The effective annual interest rate on this $227 million loan is 8.88%.
How to solve
(a) Ignoring the commitment fee, the effective annual interest rate on this line of credit is 7.88%.
(b) Suppose your firm immediately uses $227 million of the line and pays it off in one year. The effective annual interest rate on this $227 million loan is 8.88%.
Here is the calculation for the effective annual interest rate considering the compensating balance:
Effective Annual Interest Rate=Quarterly Interest Rate×4+Compensating Balance Rate
Plugging in the values, we get:
effective annual interest rate = (1.97% * 4) + 1% = 8.88%
Therefore, the effective annual interest rate on this $227 million loan is 8.88%.
The Complete Question
In exchange for a $400 million fixed commitment line of credit, your fim has agreed to do the following 1. Pay 1.97 percent per quarter on any funds actually borrowed 2. Maintain a 1 percent compensating balance on any funds actually borrowed 3. Pay an up-front commitment fee of 0.23 percent of the amount of the line Required: 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 piace lede. 2. calculaions.
Enter your answer as a percentage rounded to 2 decimal round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g, 32.16).) places (e.g., 32.16) Effective annual rate (b) Suppose your firm immediately uses $227 million of the line and pays it off in one year. What is the effective annual interest rate on this $227 million loan? (Do not round intermediate calculations. Enter your answer as a Effective annual rate