58. You have a line of credit arrangement which allows you to borrow up to $80 m

Question

58. You have a line of credit arrangement which allows you to borrow up to $80 million at any time. The interest rate is 0.63% per month. The arrangement also requires a compensating balance equal to 6% of the amount borrowed which must be placed in a non-interest-bearing account. The bank uses compound interest on its LOC loans.

a. If you borrow the entire line, how much will you actually be able to use?

b. How much is your monthly interest payment? What is your periodic interest rate and EAR? c. If you need $19 million and repay it in 10 months, how much interest will you pay?

Explanation / Answer

A) the actual amount that can be used is 94% of the maximum amount which is $ 80 million in this case as 6% must be placed in a non interest bearing account

= 80,000,000 * 94%

= $ 75,200,000 or $ 75.2 million

B)

total interest is = $ 798,944

S.No Monthly Installment Interest Principal Balance 0 19000000 1 1979894 143640 1836254 17163746 2 1979894 129758 1850137 15313609 3 1979894 115771 1864124 13449486 4 1979894 101678 1878216 11571269 5 1979894 87479 1892416 9678854 6 1979894 73172 1906722 7772131 7 1979894 58757 1921137 5850994 8 1979894 44234 1935661 3915333 9 1979894 29600 1950295 1965039 10 1979894 14856 1965039 0

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