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#2: You've worked out a line of credit arrangement that allows you to borrow up to $50 million at any time. The interest rate is
\#2: You've worked out a line of credit arrangement that allows you to borrow up to $50 million at any time. The interest rate is 0.6% per month. However, 20% of the amount that you borrow must be deposited in a non-interest-bearing account as a compensating balance. Assume that your bank uses compound interest on its line of credit loans. a) You need $5 million to launch a new product range for your firm. You intend to repay the loan in one month's time. What is the Effective Annual Rate (EAR) on this borrowing? b) Your Financial Controller tells you that he is only willing to borrow if the EAR of the loan does not exceed 8.30\%. He suggests that you negotiate with the bank to lower the compensating balance percentage. What maximum compensating balance percentage would you negotiate for
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