On July 1, 2013, the Southwest Forging Corporation arranged for a line of credit with the First

Question:

On July 1, 2013, the Southwest Forging arranged for a with the First National Bank of Dallas. The terms of the agreement call for a $ 100,000 maximum loan with interest set at 1 percent over prime. In addition, the firm has to maintain a 20 percent compensating balance in its demand deposit account throughout the year. The prime rate is currently 12 percent.
a. If Southwest normally maintains a $20,000 to $30,000 balance in its checking account with FNB of Dallas, what is the effective cost of credit under the agreement when the maximum loan amount is used for a full year?
b. Recompute the effective cost of credit if the firm borrows the compensating balance and the maximum possible amount under the loan agreement. Again, assume the full amount of the loan is outstanding for a whole year.
Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... 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...