In exchange for a $400 million fixed commitment line of credit, your firm has ag
ID: 2754485 • Letter: I
Question
In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following:
1. Pay 1.83 percent per quarter on any funds actually borrowed.
2. Maintain a 3 percent compensating balance on any funds actually borrowed.
3. Pay an up-front commitment fee of 0.28 percent of the amount of the line.
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 $213 million of the line and pays it off in one year. What is the effective annual interest rate on this $213 million loan? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Required: Based on this information, answer the following: (a)Ignoring the commitment fee, what is the effective annual interest rate on this line of credit? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Explanation / Answer
Ans(a): It has been assumed that in the 1st option total 400Mn$ of the line has been utilised/borrowed in a year span. Hence, in this case the effective annual interest rate will be :
$400Mn x 3% = 12$ will be the compensating balance
400$ x 1.83% = 7.32$ per quarter x 4 (quarter) = 29.28$
Therefore total payment will be 12$ + 29.28$ = 41.28$
Therefore effective annual interest rate will be = 41.28 / 400 = 10.32% PA
Ans(b) : $213Mn x 1.83% = $3.8979 per quarter x 4 quarter = 15.5916$
Compensatary balance = 213 x 3% = 6.39$
Commitment fee = 213 x 0.28% = 0.5964$
Therefore total payment will be = 15.5916 + 6.39 + 0.5964 = 22.578$
Therefore, effective rate of interest will be = 22.578 / 213 = 10.60% PA