Ignoring the commitment fee, what is the effective annual interest rate on this
ID: 2753960 • Letter: I
Question
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 $217 million of the line and pays it off in one year. What is the effective annual interest rate on this $217 million loan? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following: 1. Pay 1.87 percent per quarter on any funds actually borrowed. 2. Maintain a 1 percent compensating balance on any funds actually borrowed. 3. Pay an up-front commitment fee of 0.23 percent of the amount of the line.Explanation / Answer
a)Effective annual interest rate=(1+0.0187)^4-1=7.69%
For compesating balance the oppurtunity interest rate =7.69%/(1-1%)=7.77%
Effective annual rate=7.69%+7.77%=15.46% of funds borrowed
b)If we consider the commitment fee then the effective annua rate is:
Commitment fee=0.23%400mn=$0.92 mn
annual rate=[(15.46%*217mn)+0.92mn]/400
=8.62%