Question

A firm has an average loan outstanding of $75,000,000 on a $100,000,000 line of credit. There is a commitment fee of 0.25% on the unused portion of the line, and the interest rate on the borrowed funds is LIBOR 175 basis points. LIBOR is 3.0%. What is the effective annual borrowing rate on the line of credit

Answer 1

2.44%

Step-by-step explanation:

Average outstanding loan = $75,000,000

Total line of credit = $100,000,000

Unused portion = $25,000,000 ($100,000,000-$75,000,000)

Commitment fee = 0.25%

Interest rate = 3.175% (3+0.175%)

Commitment fee = Unused portion*Commitment fee rate

Commitment fee = $25,000,000*0.0025

Commitment fee = $62,500

Interest = Average outstanding balance*Interest rate

Interest = $75,000,000*0.03175

Interest = $2,381,250

Total borrowing cost = Commitment fee + Interest

Total borrowing cost = $62,500 + $2,381,250

Total borrowing cost = $2,443,750

Effective borrowing rate = Total borrowing cost / Credit limit

Effective borrowing rate = $2,443,750/$100,000,000

Effective borrowing rate = 0.0244375

Effective borrowing rate = 2.44%