You've worked out a line of credit arrangement that allows you to borrow up to $50 million at any time. The interest rate is 0.5 percent per month.

You've worked out a line of credit arrangement that allows you to borrow up to $50 million at any time. The interest rate is 0.5 percent per month. In addition, 7 percent of the amount that you borrow must be deposited in a non-interest bearing account. Assume your bank uses compound interest on its line of credit loans. What is the effective annual interest rate on this lending arrangement?    A.  6.65 percent B.  6.72 percent C.  6.81 percent D.  6.87 percent E.  6.94 percent Monthly interest = $50,000,000 (0.005) = $250,000 Amount received = (1 - 0.07) $50,000,000 = $46,500,000 Periodic interest = $250,000/$46,500,000 = 0.00537634 EAR = (1 + 0. 00537634)12 - 1 = 6.65 percent

106.

A bank offers your firm a revolving credit arrangement for up to $115 million at an interest rate of 2 percent per quarter. The bank also requires you to maintain a compensating balance of 5 percent against the unused portion of the credit line, to be deposited in a non-interest-bearing account. Assume you have a short-term investment account at the bank that pays 1.3 percent per quarter, and assume the bank uses compound interest on its revolving credit loans. What is the effective annual interest rate on the revolving credit arrangement if your firm does not borrow any money during the year?    A.  0 percent B.  5.0 percent C.  5.2 percent D.  5.3 percent E.  5.5 percent EAR = (1 + 0.013)4 - 1 = 5.30 percent