Question
Mr.Fernandez has applied for a revolving credit line of $6 million to assist in marketing a new product line. The terms of the loan will
Mr.Fernandez has applied for a revolving credit line of $6 million to assist in marketing a new product line. The terms of the loan will be as follows:
a.a commitment fee of 0 percent on the unused portion of the loan will be charged. b.there will be no compensatory balance requirements on outstanding loans but 10 percent on the total credit line. c.the bank will pay 4 percent interest on demand deposits. d.the rate of interest to be charged will be the prime rate plus 3 percent. e.the credit line will be extended for a period of three years.
the loan officer estimates that mr.fernandez will use about 60 percent of the credit line on average. if the prime rate is 10 percent and the required reserve rate on demand deposit is 20 percent and it is not a discount loan, compute the effective cost to mr.fernandez.
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