You’ve worked out a line of credit arrangement that allows you to borrow up to $
ID: 2793315 • Letter: Y
Question
You’ve worked out a line of credit arrangement that allows you to borrow up to $60 million at any time. The interest rate is .577 percent per month. In addition, 2 percent of the amount that you borrow must be deposited in a noninterest-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? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Effective annual rate %
b. Suppose you need $18.62 million today and you repay it in four months. How much interest will you pay? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Total interest paid $
Explanation / Answer
Amount to be borrowed = $ 60 million
Interest amount per month = 0.00577 * 60000000 = $ 346,200
amount remaining after subtracting the deposit in noninterest bearing account = 60 million * (1-2%)
= $ 58,800,000
Monthly interest rate = 346200/58800000 = 0.005887 or .5887 %
effecttive annual rate = (1+.5887%)^12 -1 = 7.29%
b) Interest amount = Amount borrowed * (1 + interest rate per year) * t
= 18.62 million * (1+7.29%)^4/12 - 18.62 million
= $ 441,895.8
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