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New Town Bank offers you a $40,000 line of credit with an interest rate of 1.6 percent per quarter. The loan agreement also requires that
New Town Bank offers you a $40,000 line of credit with an interest rate of 1.6 percent per quarter. The loan agreement also requires that 3 percent of the unused portion of the credit line be deposited in a non-interest-bearing account as a compensating balance. Short-term investments are currently paying 1.1 percent per quarter. What is the effective annual interest rate on the line of credit if you borrow the entire $40,000 for one year? Assume any funds borrowed or invested use compound interest.
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