You’ve worked out a line of credit arrangement that allows you to borrow up to $
ID: 2664580 • Letter: Y
Question
You’ve worked out a line of credit arrangement that allows you to borrow up to $ 50 million at any time. The interest rate is .72 percent per month. In addition, 4 percent of the amount that you borrow must be deposited in a non-interest-bearing- account. Assume that your bank uses compound interest on its line of credit loans.(a) what is the effective annual interest rate on this lending arrangement?
(b) suppose you need $ 15 million today and you repay it in six months. How much interest will you pay?
Explanation / Answer
Using the traditional formula for part (a) {EAR=[1+(i/n)]^n -1} you get an effective annual rate of 101.2%. This seems a bit insane, perhaps the monthly interest rate is lower? Part (b) is simply the accumulated value minus the loan amount accumulated value=p(1+i)^t , p=15million , i=.72 , t=6 accumulated value-original loan= interest 388,384,545.7 - 15,000,000 = 373,384,545.7 That is the basic idea. Like I said before .72 seems rather high for a monthly interest rate.
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