Question

(Cost of​ short-term bank loan​) On July​ 1, 2015, the Southwest Forging Corporation arranged for a line of credit with the First National Bank​ (FNB) of Dallas. The terms of the agreement call for a ​$120,000 maximum loan with interest set at 2 percent over prime. In​ addition, the firm has to maintain a 19 percent compensating balance in its demand deposit account throughout the year. The prime rate is currently 12 percent. Note​: Interest is not paid in advance​ (discounted).
a. If Southwest normally maintains a ​$22,800 to ​$34,800 balance in its checking account with FNB of​ Dallas, what is the effective cost of credit under the​ line-of-credit agreement when the maximum loan amount is used for a full​ year?
b. Compute the effective cost of credit if the firm borrows the compensating balance and the maximum possible amount under the loan agreement.​ Again, assume the full amount of the loan is outstanding for a whole year.

a.  If Southwest normally maintains a ​$22,800 to ​$34,800 balance in its checking account with FNB of​ Dallas, what is the effective cost of​ credit, or APR​, under the​ line-of-credit agreement when the maximum loan amount is used for a full​ year?

_____%

b. If the firm borrows the compensating balance and the maximum possible amount under the loan​ agreement, what is the effective cost of​ credit, or APR​?

____%

Answer 1