In exchange for a $400 million fixed commitment line of credit, your firm has ag
ID: 2736349 • 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).) (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 $213 million loan? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)Explanation / Answer
( a) Effective annual rate = 7.76%
(b) Effective annual rate
R = (1 + i / n) n – 1
= (1+ 0.7 / 12 months) 12 – 1
= 7.85%