In exchange for a $420 million fixed commitment line of credit, your firm has ag
ID: 2745327 • Letter: I
Question
In exchange for a $420 million fixed commitment line of credit, your firm has agreed to do the following:
Pay 3.0 percent per quarter on any funds actually borrowed.
Maintain a 5 percent compensating balance on any funds actually borrowed.
Pay an up-front commitment fee of 0.120 percent of the amount of the line.
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 and round your answer to 2 decimal places. (e.g., 32.16))
Suppose your firm immediately uses $200 million of the line and pays it off in one year. What is the effective annual interest rate on this $200 million loan? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
In exchange for a $420 million fixed commitment line of credit, your firm has agreed to do the following:
Explanation / Answer
1) Effective annual rate = (1 + 3/95)^4 - 1 = 13.24%
2) Effective annual rate = (1 + 3/95)^4 - 1 + (420*.120%/200) = 13.50%