*Part a) is correct need help with b). In exchange for a $400 million fixed comm
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*Part a) is correct need help with b).
In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following: Pay 1.99 percent per quarter on any funds actually borrowed. Maintain a 2 percent compensating balance on any funds actually borrowed. Pay an up-front commitment fee of 0.21 percent of the amount of the line. Based on this information, answer the following: Ignoring the commitment fee. what is the effective annual interest rate on this line of credit? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Suppose your firm immediately uses $229 million of the line and pays it off in one year. What is the effective annual interest rate on this $229 million loan? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)Explanation / Answer
EAR on line of credit = { [ Principal * Interest Rate] + Commitment Fees } / Principal - Compensating balance
Compensating balance = 2% * $ 229million = $ 4.58 million
Commitment Fees = 0.21% * 400million = $ 0.84 million
EAR = ( [ 229million * 1.99%] * 4 + 0.84million) / (229 -4.58)million
EAR = 8.497% or 8.50%
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