Question

Come and Go Bank offers your firm a *discount* interest
loan with an interest rate of 8 percent for up to $17 million, and
in addition requires you to maintain a 4 percent compensating
balance against the face amount borrowed.

What is the effective annual interest rate on this lending
arrangement? **(Do not round intermediate calculations and
enter your answer as a percent rounded to 2 decimal places, e.g.,
32.16.)**

Effective annual rate

Answer #1

Given that the interest rate is 8%; and that the face value of amount borrowed is $17 million.

Therefore, amount paid in terms of interest = 17 million * 8% = $1.36 million.

Amount blocked in compensating balance = 17 million * 4% = $680,000. Hence, interest lost due to blocking these funds = 680,000 * 8% = $54,400 per annum.

Hence, total cost of taking the loan = $ 1,360,000 + 54,400 = $ 1,414,400.

Hence, effective rate of interest = $ 1.4144 million / 17million *100 = 8.32% per annum.

Cheap Money Bank offers your firm a discount interest
loan at 5 percent for up to $18 million and, in addition, requires
you to maintain a 2 percent compensating balance against the amount
borrowed.
What is the effective annual interest rate on this lending
arrangement? (Do not round intermediate calculations and
enter your answer as a percent rounded to 2 decimal places, e.g.,
32.16.)

A bank offers your firm a revolving credit arrangement for up to
$50 million at an interest rate of 1.25 percent per quarter. The
bank also requires you to maintain a compensating balance of 3
percent against the unused portion of the credit line, to
be deposited in a noninterest-bearing account. Assume you have a
short-term investment account at the bank that pays .60 percent per
quarter, and assume that the bank uses compound interest on its
revolving credit loans....

A firm offers terms of 1/10, net 35.
a. What effective annual interest rate does the firm earn when a
customer does not take the discount? (Do not round intermediate
calculations and enter your answer as a percent rounded to 2
decimal places, e.g., 32.16.)
b. What effective annual interest rate does the firm earn if the
discount is changed to 2 percent? (Do not round intermediate
calculations and enter your answer as a percent rounded to 2
decimal places,...

A firm offers terms of 1.4/10, net 60.
a.
What effective annual interest rate does the firm earn when a
customer does not take the discount? (Use 365 days a year.
Do not round intermediate calculations and enter your answer as a
percent rounded to 2 decimal places, e.g., 32.16.)
b.
What effective annual interest rate does the firm earn if the
terms are changed to 2.4/10, net 60, and the customer does not take
the discount? (Use 365...

You plan to borrow $30,000 from the bank to pay for inventories
for a gift shop you have just opened. The bank offers to lend you
the money at 10 percent annual interest for the 6 months the funds
will be needed.
a. Calculate the effective rate of interest on the loan.
b. In addition, the bank requires you to maintain a
compensating balance of 15 percent in the bank. Because you are
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In exchange for a $400 million fixed commitment line of credit,
your firm has agreed to do the following:
Pay 1.7 percent per quarter on any funds actually
borrowed.
Maintain a 2 percent compensating balance on any funds actually
borrowed.
Pay an up-front commitment fee of 0.21 percent of the amount of
the line.
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...

In exchange for a $400 million fixed commitment line of credit,
your firm has agreed to do the following:
Pay 1.97 percent per quarter on any funds actually
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Maintain a 1 percent compensating balance on any funds actually
borrowed.
Pay an up-front commitment fee of 0.23 percent of the amount of
the line.
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...

A firm offers terms of 1.8/10, net 30.
a.
What effective annual interest rate does the firm earn when a
customer does not take the discount? (Use 365 days a year.
Do not round intermediate calculations and enter your answer as a
percent rounded to 2 decimal places, e.g., 32.16.)
b.
What effective annual interest rate does the firm earn if the
terms are changed to 2.8/10, net 30, and the customer does not take
the discount? (Use 365...

In exchange for a $400 million fixed commitment line of credit,
your firm has agreed to do the following: Pay 1.84 percent per
quarter on any funds actually borrowed. Maintain a 2 percent
compensating balance on any funds actually borrowed. Pay an
up-front commitment fee of 0.29 percent of the amount of the line.
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...

In exchange for a $400 million fixed commitment line of credit,
your firm has agreed to do the following:
Pay 1.88 percent per quarter on any funds actually
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Maintain a 3 percent compensating balance on any funds actually
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Pay an up-front commitment fee of 0.22 percent of the amount of
the line.
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
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