In exchange for a $400 million fixed commitment line of credit, your firm has ag
ID: 2735714 • Letter: I
Question
In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following: Pay 1.83 percent per quarter on any funds actually borrowed. Maintain a 3 percent compensating balance on any funds actually borrowed. Pay an up-front commitment fee of 0.28 percent of the amount of the line. Required: Based on this information, answer the following: (a) Ignoring the commitment fee, what is the effective annual interest rate on this line of credit? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Effective annual rate 7.76 % (b) Suppose your firm immediately uses $213 million of the line and pays it off in one year. What is the effective annual interest rate on this S213 million loan? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Effective annual rate %Explanation / Answer
1.Calculation of Effective annual rate :
Normal rate of interest for 4 quarter = 7.523% (1.0183)power to 4
Amount borrowed = $213million
Compensating balance to be maintained = $6.39million
Up front commitment fee expenses = $0.5964
Amount actually taken by borrower = $206.0136
Effective annual rate = 7.78% (7.523%*213/206.0136)