Question
A bank offers your firm a revolving credit arrangement for up to $105 million at an interest rate of 2.3 percent per quarter. The bank
A bank offers your firm a revolving credit arrangement for up to $105 million at an interest rate of 2.3 percent per quarter. The bank also requires you to maintain a compensating balance of 6 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 1.6 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? |
b. What is your effective annual interest rate on the lending arrangement if you borrow $1 million immediately and repay it in one year? |
c. What is your effective annual interest rate if you borrow $105 million immediately and repay it in one year? |
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