Question

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.** What is your effective annual interest rate (an
opportunity cost) on the revolving credit arrangement if your firm
does not use it during the year? **(Do not round intermediate
calculations. Enter your answer as a percent rounded to 2 decimal
places, e.g., 32.16.)**

Effective annual interest rate
%

**b.** What is your effective annual interest rate on
the lending arrangement if you borrow $20 million immediately and
repay it in one year? **(Do not round intermediate
calculations. Enter your answer as a percent rounded to 2 decimal
places, e.g., 32.16.)**

Effective annual interest rate
%

**c.** What is your effective annual interest rate if
you borrow $50 million immediately and repay it in one year?
**(Do not round intermediate calculations. Enter your answer
as a percent rounded to 2 decimal places, e.g.,
32.16.)**

Effective annual interest rate
%

Answer #1

You’ve worked out a line of credit arrangement that allows you
to borrow up to $40 million at any time. The interest rate is .36
percent per month. In addition, 4 percent of the amount that you
borrow must be deposited in a non-interest-bearing account. Assume
that your bank uses compound interest on its line of credit
loans.
a. What is the effective annual interest rate on this lending
arrangement? (Do not round intermediate calculations and enter your
answer as...

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.)

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
borrowed.
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...

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...

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

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
borrowed.
Maintain a 3 percent compensating balance on any funds actually
borrowed.
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...

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...

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...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 36 minutes ago

asked 36 minutes ago

asked 36 minutes ago

asked 37 minutes ago

asked 50 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago