Question
ABC Corporation got a $45 million line of credit of which it is expected to use 65%. ABC was given an 9% interest rate with
ABC Corporation got a $45 million line of credit of which it is expected to use 65%. ABC was given an 9% interest rate with a 1% front-end fee and a 1/2% commitment fee on the unused balances; a 7% compensating balance on any usage plus a 5% compensating balance on the total line. (The compensating balances earn zero interest.) The bank has a 15% reserve requirement. a) What is the banks effective yield on the line? b) What is the borrowers effective cost? c) Suppose the borrower wants to exchange compensating balances for a higher interest rate, what would be the new rate of interest?
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