Home / Questions / Problem 16-17 Costs of Borrowing LO3 In exchange for a $400 million fixed commitment line ...
Problem 16-17 Costs of Borrowing [LO3]
In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following: | |
1. | Pay 1.95 percent per quarter on any funds actually borrowed. |
2. | Maintain a 4 percent compensating balance on any funds actually borrowed. |
3. | Pay an up-front commitment fee of 0.3 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 round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
Effective annual rate | % |
(b) |
Suppose your firm immediately uses $225 million of the line and pays it off in one year. What is the effective annual interest rate on this $225 million loan? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
Effective annual rate | % |
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