A company is able to borrow up to $20 million from its line of credit at any time but is required to maintain a 4% compensating balance on any funds actually borrowed, which is deposited in a non-interest bearing account. The current interest rate is 0.5%. Assume compound interest is used.

a. what is the effective annual interest rate?

b. assume the company needs $15 million dollars today and plans to repay it entirely in 1 year. if the company can negotiate a lower interest rate of 0.4% per month, how much interest would be saved? Assume a 4% compensating balance on any funds actually borrowed is still required.