Question

# In exchange for a \$400 million fixed commitment line of credit, your firm has agreed to...

In exchange for a \$400 million fixed commitment line of credit, your firm has agreed to do the following:

1. Pay 1.88 percent per quarter on any funds actually borrowed.
2. Maintain a 3 percent compensating balance on any funds actually borrowed.
3. 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 not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Effective annual rate 7.91 %

b. Suppose your firm immediately uses \$218 million of the line and pays it off in one year. What is the effective annual interest rate on this \$218 million loan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Effective annual rate             % (THE ANSWER IS NOT 8.01)