You’ve worked out a line of credit arrangement that allows you to borrow up to $

Question

You’ve worked out a line of credit arrangement that allows you to borrow up to $40 million at any time. The interest rate is .615 percent per month. In addition, 5 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.

What is the effective annual interest rate on this lending arrangement? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Suppose you need $15 million today and you repay it in six months. How much interest will you pay? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Round your answer to 2 decimal places (e.g., 32.16).)

You’ve worked out a line of credit arrangement that allows you to borrow up to $40 million at any time. The interest rate is .615 percent per month. In addition, 5 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.

Explanation / Answer

a)

Monthly interest = 40000000*0.615% = 246000

amount = (1-5%)*40000000 = 38000000

monthly rate = 246000 / 38000000 = 0.6474%

EAR = (1+0.6474%)12 - 1 = 8.05%

b)

6 months rate = (1+0.6474%)6 - 1 = 3.948%

Interest paid = 15000000*3.948% = 592142.80

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