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Your bank offers a $25,000 line of credit with an interest rate of 2.25% per quarter. The loan agreement also requires that 4% of the

Your bank offers a $25,000 line of credit with an interest rate of 2.25% per quarter. The loan agreement also requires that 4% of the unsecured portion of the credit line be deposited in a non interest bearing account as a compensating balance. Your short term investments are paying 0.40% per month. What is your effective annual interest rate on this agreement if you do not borrow any money on this credit line during the year? Assume any funds borrowed or invested use compound interest.

4.67%

4.78%

4.91%

5.23%

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