In exchange for a dollar 400 million fixed commitment line of credit, your firm
ID: 2737223 • Letter: I
Question
In exchange for a dollar 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: 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 % Suppose your firm immediately uses S213 million of the line and pays it off in one year. What is the effective annual interest rate on this dollar 213 million loan? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Effective annual rateExplanation / Answer
Calculate the Amount received:
Interest paid = Amount Borrowed *Annual interest rate
= 213,000,000*((1.0183)^4 - 1)
= 16,024,835.
Amount received = (1-Compensating balance %)*Amount Borrowed - Commitment fees * line of credit
= ((1-0.03)*213,000,000) - (0.0028*400,000,000)
= 205,490,000.
EAR = Interest Paid / Amount received = 16024835/205490000 = 0.077984 or 7.7984%.