question 1

A bank offers your firm a revolving credit arrangement for up to $86 million at an interest rate of 2.15% per quarter. The bank also requires you to maintain a compensating balance of 2% 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 1.50% per quarter, and assume that the bank uses compound interest on its revolving credit loans. (Do not round intermediate calculations. Round the final answers to 2 decimal places.)

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?

Effective annual interest rate %

b. What is your effective annual interest rate on the lending arrangement if you borrow $50 million immediately and repay it in one year?

Effective annual interest rate %

c. What is your effective annual interest rate if you borrow $86 million immediately and repay it in one year?

Effective annual interest rate %

2.

In exchange for a $600 million fixed commitment line of credit, your firm has agreed to do the following:

1. Pay 2.0% per quarter on any funds actually borrowed.

2. Maintain a 5% compensating balance on any funds actually borrowed.

3. Pay an up-front commitment fee of 0.190% of the amount of the line.

Based on this information, answer the following:

a. Ignoring the commitment fee, what is the effective annual interest rate on this line of credit? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Effective annual interest rate %

b. Suppose your firm immediately uses $100 million of the line and pays it off in one year. What is the effective annual interest rate on this $100 million loan? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Effective annual interest rate %