In exchange for a $400 million fixed commitment line of credit, your firm has ag
ID: 2736798 • Letter: I
Question
In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following: Pay 1.97 percent per quarter on any funds actually borrowed. Maintain a 1 percent compensating balance on any funds actually borrowed. Pay an up-front commitment fee of 0.23 percent of the amount of the line. Required: Based on this information, answer the following: 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).) Suppose your firm immediately uses #227 million of the line and pays it off in one year. What is the effective annual interest rate on this $227 million loan? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)Explanation / Answer
Solution.
Calculation for effective rate.
a. (1 + 0.0197 / 0.99)4 - 1
= 12.55%
B.
(Interest + Commitment) / (Amt Borrowed * (1-compensating balance %))
= ( 1.97 + 0.23 ) / ( 227 x 0.99 )
= 2.2 / 224.73
= 8.02%
=