In exchange for a $400 million fixed commitment line of credit, your firm has ag
ID: 2737006 • 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: (a) Ignoring the commitment fee, what is the effective annual interest rate on this line of credit? (b) 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?Explanation / Answer
a)The effective annul arte of interest would be fgiven by
= (1 + quartery interest )^4-1
=(1.0197)^4-1
=8.12%
b) Int hsi case we have to take effect of commitmens fees also
= 8.12% +0.23% =8.35%