Question
Your firm's bank has offered you two options for short-term financing in the amount of $400,000. The first option is a committed line of credit
Your firm's bank has offered you two options for short-term financing in the amount of $400,000. The first option is a committed line of credit with a commitment fee of 0.5% (EAR) and an interest rate of 8% (APR, compounded quarterly). The second option is a loan with a 5% compensating balance and an interest rate of 7.6% (APR, compounded quarterly). If you need $380,000 in financing at the beginning of the year and plan to pay it back at the end of the year, which option has a lower effective annual rate of interest?
a. The EAR of 8% APR compounded quarterly is %. (Round to two decimal places.) b. The EAR of 7.6% APR compounded quarterly is %. (Round to two decimal places.) c. The EAR for the first option is %. (Round to two decimal places.) d. The EAR for the second option is %. (Round to two decimal places.) e. Choose the (answer either "first" or "second") option because it has the lower effective annual rate of interest.
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