On January 2, 20X1, City Hospital established a line of credit with First Union

Question

On January 2, 20X1, City Hospital established a line of credit with First Union National Bank. The terms of the line of credit called for a $200,000 maximum loan with an interest of 11 percent. Then compensating balance requirement is 15 percent of the total line of credit (with no additional fees charged).

What is the effective interest rate for City Hospital if 50 percent of the total amount were used during the year?

How would the answer to part of a change if the additional fees were $500?

How would the answer to part of a change if the additional fees were $1,000?

Explanation / Answer

EAR = 0.11/(1-0.15) = 12.94%

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