A bank offers your firm a revolving credit arrangement for up to $52 million at

Question

A bank offers your firm a revolving credit arrangement for up to $52 million at an interest rate of 1.30 percent per quarter. The bank also requires you to maintain a compensating balance of 2 percent against the unused portion of the credit line, to be deposited in a non-interest-bearing account. Assume you have a short-term investment account at the bank that pays .65 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 $22 million immediately and repay it in one year? (Do not round intermediate calculations and round your final answer to 2 decimal places; e.g., 32.16)

A.5.37%

B.5.26%

C.2.63%

D.2.60%

A.5.37%

B.5.26%

C.2.63%

D.2.60%

Explanation / Answer

Amount borrowed 22000000 Ineterst rate 1.30% Per Quarter Term                 1 Year Total Compunded value = 22000000*(1+0.013)^4 23166502 Ineterest = (23166502-22000000) 1166502 Compensating balance (22000000*2%) 440000 Interest rate 0.65% Per Quarter Term                 1 Year Total Compunded value = 440000*(1+0.0065)^4 451552 Ineterest = (451552-440000) 11552 Total Interest cost = (1166502+11552) (A) 1178054 Total Fund raised = (B) 22000000 effective annual interest rate = A/B 5.37%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.