Your bank offers you a $140,000 line of credit with an interest rate of 2.30 percent per quarter. The loan agreement also requires that 7 percent of the unused portion of the credit line be deposited in a non-interest-bearing account as a compensating balance. Your short-term investments are paying 1.55 percent per quarter. What is your effective annual interest rate if you borrow the whole $140,000 for the entire year? What will be the carrying cost in this problem? What will be the shortage cost in this problem?
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Your bank offers you a $140,000 line of credit with an interest rate of 2.30 percent per quarter. The loan agreement also requires that 7 percent of the unused portion of the credit line be deposited in a non-interest-bearing account as a compensating balance. Your short-term investments are paying 1.55 percent per quarter. What is your effective annual interest rate if you borrow the whole $140,000 for the entire year? What will be the carrying cost in this problem? What will be the shortage cost in this problem?
Please explain all work
Related questions
| A bank offers your firm a revolving credit arrangement for up to $72 million at an interest rate of 1.80 percent per quarter. The bank also requires you to maintain a compensating balance of 6 percent against the unused portion of the credit line, to be deposited in a non-interest-bearing account. Assume you have a short-term investment account at the bank that pays 1.15 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 and round your final answer 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 $38 million immediately and repay it in one year? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) |
| Effective annual interest rate | % |
| c. | What is your effective annual interest rate if you borrow $72 million immediately and repay it in one year? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) |
| Effective annual interest rate | % |
