Question

Mr. Fernandez has applied for a revolving credit line of $ 4 million to assist in marketing a new product line. The terms of the loan will be as follows:

(a) The loan will not be a discount loan. (

b) A commitment fee of 0.2 percent on the unused portion of the loan will be charged.

(c) The compensatory balance requirements will be 7 percent on the total credit line and 6 percent on the outstanding loans. (

d) The bank will pay 3 percent interest on demand deposits.

(e) The rate of interest to be charged will be the prime rate plus 3 percent.

(f) The bank will use the "actual/360" accrual method to compute interest payments.

(g) The credit line will be extended for a period of three years.

The loan officer estimates that Mr. Fernandez will use about 64 percent of the credit line on average. If the prime rate is 10 percent and the required reserve rate on demand deposits is 16 percent. What is the effective cost to Mr. Fernandez? Enter your answer in decimals and keep 4 decimal places (e.g., write 15.526% as .1553). (Please use Step-by-Step)

Answer 1

	Credit Line	Commitment fee	Compensatory Fee	Utilisation interest	Total Charges
		0.20%	7.00%	6.00%
	$       40,00,000		$       2,80,000.00		280000
Utilisation	64%				0
Utilisation	$       25,60,000			$      1,53,600.00	153600
Unused	$       14,40,000	$        2,880.00			2880
					436480
Effective cost to Mr Fernandez					0.1705