Ignoring the commitment fee, what is the effective annual interest rate on this

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 $210 million of the line and pays it off in one year. What is the effective annual interest rate on this $210 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 1.6 percent per quarter on any funds actually borrowed. 2. Maintain a 5 percent compensating balance on any funds actually borrowed. 3. Pay an up-front commitment fee of .30 percent of the amount of the line.

Explanation / Answer

a)

Effctive quarterly rate = 1.6% / (1-5%) = 1.6842%

EAR = (1+1.6842%)(12/3) - 1 = 6.91%

b)

commitment fee = 210*10^6 * 0.3% = 630000

Interest amount = 6.91%*210*10^6 = 14508805.51

total fees = 14508805.51 + 630000 = 15138805.51

EAR = 15138805.51 / 210*10^6 = 7.21%

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