Foods Galore has a line of credit of $250,000 with an interest rate of 1.75 perc
ID: 2816414 • Letter: F
Question
Foods Galore has a line of credit of $250,000 with an interest rate of 1.75 percent per quarter. The credit line also requires that 1.5 percent of the unused portion of the credit line be deposited in a non-interest-bearing account as a compensating balance. Food Galore’s short-term investments are earning .45 percent per quarter. What is the effective annual interest rate on this arrangement if the line of credit goes unused all year? Assume any funds borrowed or invested use compound interest
Foods Galore has a line of credit of $250,000 with an interest rate of 1.75 percent per quarter. The credit line also requires that 1.5 percent of the unused portion of the credit line be deposited in a non-interest-bearing account as a compensating balance. Food Galore’s short-term investments are earning .45 percent per quarter. What is the effective annual interest rate on this arrangement if the line of credit goes unused all year? Assume any funds borrowed or invested use compound interest
Explanation / Answer
The short term investments are earnings 0.45% per quarter
Effective annual interest rate = (1.0045)^4 - 1 = 1.81%
The effective annual interest rate would be 1.81% on this arrangement.