In exchange for a $400 million fixed commitment line of credit, your firm has ag
ID: 2750045 • Letter: I
Question
In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following: Pay 1.9 percent per quarter on any funds actually borrowed. Maintain a 4 percent compensating balance on any funds actually borrowed. Pay an up-front commitment fee of 0.25 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 % Suppose your firm immediately uses $220 million of the line and pays it off in one year. What is the effective annual interest rate on this $220 million loan? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Effective annual rate %Explanation / Answer
EAR:
= [(1+1.9%)^4-1]÷96%
= 8.15%
EAR:
= ([(1+1.9%)^4-1]+0.25%)÷95.75%
= 8.43%