q10 In exchange for a $400 million fixed commitment line of credit, your firm ha
ID: 2767727 • Letter: Q
Question
q10
In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following: Pay 1.96 percent per quarter on any funds actually borrowed. Maintain a 5 percent compensating balance on any funds actually borrowed. Pay an up-front commitment fee of 0.24 percent of the amount of the line. Required: 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 $226 million of the line and pays it off in one year. What is the effective annual interest rate on this $226 million loan? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).Explanation / Answer
A) if the firm borrows $ 400 million, the effective rate = 1.96*4 + 5 = 7.84+5 = 12.84%
B) if it borrows 226 million then = 226*1.96%*4 + 400*5.24% / 226*100 = 17.13%
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