PART (B) of this question value: 10.00 points n exchange for a $400 million fixe
ID: 2737107 • Letter: P
Question
PART (B) of this question
value: 10.00 points n exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following: 1. Pay 1.99 percent per quarter on any funds actually borrowed 2. Maintain a 2 percent compensating balance on any funds actually borrowed 3. Pay an up-front commitment fee of 0.21 percent of the amount of the line. Required: Based on this information, answer the following: (a) ignoring the commitment fee, what is the effective annual interest rate on this line of credit? (Do not places (e.g., 32.16).) calculations. Enter your answer as a percentage rounded to 2 decimal round intermediate Effective annual rate 8.37 (b) 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).) 8.40 Effective annual rateExplanation / Answer
Answer for part - b
The effective annual interest rate is = (Interest + Commitment) / (Amt Borrowed * (1-compensating balance %))
The interest rate to be used in the formual is = (1+0.0199)^4 -1 = 0.082 = 8.2%
Interest = 0.082 * 229,000,000 = 18,778,000
Commitment = 0.21% of 400,000,000 = 840,000
Amout borrowed = 229,000,000
compesating balance % = 2% = 0.02
Hence effective annual interst = (18,778,000 + 840,000)/(229,000,000*(1-0.02)) = 19,618,000/224,420,000 = 0.087416
Effective annual interest = 0.0874 = 8.74%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.