Based on this information, answer the following: Ignoring the commitment fee, wh

Question

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 $222 million of the line and pays it off in one year. What is the effective annual interest rate on this $222 million loan? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following: 1. Pay 1.92 percent per quarter on any funds actually borrowed. 2. Maintain a 1 percent compensating balance on any funds actually borrowed. 3. Pay an up-front commitment fee of 0.27 percent of the amount of the line.

Explanation / Answer

a. Effective Annual Rate - (1 + 0.0192/0.99)4 - 1 = 0.07986 or 7.98%

b. Effective Annual rate = (Interest + Commitment) / (Amt Borrowed * (1-compensating balance %))

= (1.92 + 0.27) / (222*(1 - 0.01)) = 2.19/219.78 or 0.99%

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