Question

Pipeline Pharmaceuticals has a one-year $2 million line of credit at an interest rate of 5% (EAR). The loan has an origination fee of 2%. What is the actual interest rate paid?

Answer 1

The actual interest rate paid is computed as shown below:

The origination fees is computed as follows:

= 2% x $ 2 million

= $ 40,000

So, the loan amount will be as follows:

= $ 2 million - $ 40,000

= $ 1.96 million

The amount of interest paid is computed as follows:

= $ 2 million x 5%

= $ 0.10 million

So, the interest rate will be computed as follows:

= [ ( $ 2 million + Interest paid) / Loan amount ] - 1

= [ ( $ 2 million + $ 0.10 million) / $ 1.96 million ] - 1

= 7.14% Approximately

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