1. 17.

Costs of borrowing [LO 18.3] In exchange for a $300 million fixed commitment line of credit, your firm has agreed to do the following:

1. Pay 1.85 per cent per quarter on any funds actually borrowed.

2. Maintain a 4.5 per cent compensating balance on any funds actually borrowed.

3. Pay an up-front commitment fee of 0.25 per cent of the amount of the line.

Based on this information, answer the following:

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

2. Suppose your firm immediately uses $115 million of the line and pays it off in one year. What is the effective annual interest rate on this $115 million loan?