A bank offers your firm a revolving credit arrangement for up to $70 million at

Question

A bank offers your firm a revolving credit arrangement for up to $70 million at an interest rate of 1.9 percent per quarter. The bank also requires you to maintain a compensating balance of 4 percent against the unused portion of the credit line, to be deposited in a non-interest-bearing account. Assume that you have a short-term investment account at the bank that pays 1.05 percent per quarter, and assume that the bank uses compound interest on its revolving credit loans.

What is your effective annual interest rate on the lending arrangement if you borrow $70 million immediately and repay it in one year?

Explanation / Answer

B. 7.9141703 is the right answer

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