Question

You’ve worked out a line of credit arrangement that allows you to borrow up to $66 million at any time. the interest rate is .43 percent per month. in addition, 4 percent of the amount that you borrow must be deposited in a noninterest-bearing account. assume that your bank uses compound interest on its line of credit loans. is the effective annual interest rate on this lending arrangement? (do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b.suppose you need $36 million today and you repay it in 6 months. how much interest will you pay? (do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

The effective annual interest rate on the line of credit arrangement is 64.87%. The interest you will pay on a $36 million loan over 6 months is $928,800.

Step-by-step explanation:

To calculate the effective annual interest rate on a line of credit arrangement, we need to consider both the interest rate and the noninterest-bearing account deposit requirement.

To calculate the effective annual interest rate, you can use the formula: EAR = (1 + interest rate)^(number of compounding periods) - 1.

In this case, the interest rate is 0.43% per month, which gives us an annual interest rate of 0.43% * 12 = 5.16%. Since the interest on the loan is compounded monthly, there are 12 compounding periods in a year. Therefore, the effective annual interest rate is (1 + 0.0516)^12 - 1 = 0.6487, or 64.87%.

To calculate the interest you will pay on a $36 million loan over 6 months, you can use the formula: Interest = loan amount * (interest rate * number of compounding periods). Substituting the values, we get Interest = 36,000,000 * (0.0043 * 6) = $928,800.