Question
A bank offers your firm a revolving credit arrangement for up to $62 million at an interest rate of 1.55 percent per quarter. The bank
A bank offers your firm a revolving credit arrangement for up to $62 million at an interest rate of 1.55 percent per quarter. The bank also requires you to maintain a compensating balance of 4 percent against the unused portion of the credit line, to be deposited in a non-interest-bearing account. Assume you have a short-term investment account at the bank that pays .90 percent per quarter, and assume that the bank uses compound interest on its revolving credit loans. |
a. | What is your effective annual interest rate (an opportunity cost) on the revolving credit arrangement if your firm does not use it during the year? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
b. | What is your effective annual interest rate on the lending arrangement if you borrow $30 million immediately and repay it in one year? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
c. | What is your effective annual interest rate if you borrow $62 million immediately and repay it in one year? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started