Final answer:
We are to determine the effective annual rate (EAR) for a line of credit with a monthly interest rate and a required deposit in a noninterest-bearing account. The EAR takes into account the compounded interest and effectively increases the cost of borrowing beyond the stated interest rate.
Step-by-step explanation:
The question you've asked relates to the calculation of the effective annual rate (EAR) on a line of credit from a bank. With a given interest rate of 0.618 percent per month, compounded monthly, and a requirement to deposit 4 percent of the amount borrowed in a noninterest-bearing account, we must perform calculations to determine the true cost of borrowing to the York Company.
The calculation involves finding the monthly rate, accounting for the percentage that must be deposited and does not earn interest, and then using the formula for compound interest to find the EAR. Unfortunately, without specific formulas for the calculations, we can't provide an accurate answer to your multiple choice question. However, the general concept is that the effective annual rate will be higher than the nominal rate due to compounding effects and the requirement to hold part of the funds in a noninterest-bearing account.