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In exchange for a $500 million fixed commitment line of credit,...

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Question

Accounting

In exchange for a $500 million fixed commitment line of credit, your firm has agreed to do the following:

1.

Pay 2 percent per quarter on any funds actually borrowed.
2.

Maintain a 4 percent compensating balance on any funds actually borrowed.
3.

Pay an up-front commitment fee of .2 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. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Effective annual interest rate %

b.

Suppose your firm immediately uses $200 million of the line and pays it off in one year. What is the effective annual interest rate on this $200 million loan? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Effective annual interest rate %

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