Costs of Borrowing in exchange for a $400 million fixed commitment line of credit your firm has

Question:

Costs of Borrowing in exchange for a $400 million fixed commitment line of credit your firm has agreed to do the following.

1. Pay 1.6 percent per quarter on any funds actually borrowed.

2. Maintain a 4 percent compensating balance on any funds actually borrowed.

3. Pay an up-front commitment fee of .125 percent of the amount of the line.

Based on this information, answer the following.

a. Ignoring the commitment fee, what is the effective annual interest rate on this line of credit?

b. Suppose your firm immediately uses $210 million of the line and pays it off in one year. What is the effective annual interest rate on this $210 million loan?

Line of Credit
A line of credit (LOC) is a preset borrowing limit that can be used at any time. The borrower can take money out as needed until the limit is reached, and as money is repaid, it can be borrowed again in the case of an open line of credit. A LOC is...

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a For every dollar borrowed you pay interest of Interest 1016 0016 You also must maintain a compensa...View the full answer

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Related Book For book-img-for-question

Fundamentals of Corporate Finance

ISBN: 978-0077861629

8th Edition

Authors: Stephen A. Ross, Randolph W. Westerfield, Bradford D.Jordan

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Question Posted: May 09, 2011 06:18 AM

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Costs of Borrowing in exchange for a $400 million fixed commitment line of credit your firm has

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a For every dollar borrowed you pay interest of Interest 1016 0016 You also must maintain a compensa...View the full answer

Fundamentals of Corporate Finance

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