Question

Your company has a line of credit through a local bank. The bank requires a 6% compensating balance and charges 12% on the amount borrowed against the line. If the company needs $100,000 to purchase inventory, find the amount it should borrow, and calculate the effective annual rate on the loan (b) You’ve worked out a line of credit arrangement that allows you to borrow up to $100 million at any time. The interest rate is 0.4 percent per month. In addition, 5% of the amount that you borrow must be deposited in a non-interest bearing account (i.e. a compensating balance). Assume that your bank uses compound interest on its line of credit loans. What is the effective annual rate (EAR) on the loan? W

Answer 1

A) 19.15%

B) 68.53%

Step-by-step explanation:

as it requires 6% of compensating balance the company you ask for:

$100,000 / (1 - 6%) = 106.382,98

Now we solve for the effective rate.

106,382.98 x (1 + 0,12) = 100,000 x (1 + r)

r = 119.148,93/100,000 - 1 = 0,1914893

B) we do the same procedure as the previous one

`1/(0,95) (1+0.04)^(12) = 1+r_e`

re 0,685297072