Question

# Your​ firm's bank has offered you two options for​ short-term financing in the amount of \$500,000....

Your​ firm's bank has offered you two options for​ short-term financing in the amount of \$500,000. The first option is a committed line of credit with a commitment fee of 0.4​% ​(EAR) and an interest rate of 8​% (APR, compounded​ quarterly). The second option is a loan with a 3​% compensating balance and an interest rate of 7.6​% (APR, compounded​ quarterly). If you need \$485,000 in financing at the beginning of the year and plan to pay it back at the end of the​ year, which option has a lower effective annual rate of​ interest?

The EAR of the 8% APR compounded quarterly is ___%​(Round to three decimal​ places.)

The EAR of the 7.6​% APR compounded quarterly is __%(Round to three decimal​ places.)

The effective annual rate of interest for the first option is __%(Round to three decimal​ places.)

The effective annual rate of interest for the second option is __%(Round to three decimal​ places.)

 1] EAR = 1.02^4-1 = 8.243% 2] EAR = 1.019^4-1 = 7.819% 3] Interest charges = 485000*8.243% = \$   39,978.55 Commitment charges = 15000*0.4% = \$            60.00 Total financing charges \$   40,038.55 EAR = 40038.55/485000 = 8.255% 4] Loan required [including amount for compensating balance} = 485000/(100%-3%) = \$      5,00,000 Interest charges = 500000*7.819% = \$   39,095.00 EAR = 39095/485000 = 8.061%

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