Question

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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 1.7 percent per quarter on any funds actually borrowed.
  2. Maintain a 2 percent compensating balance on any funds actually borrowed.
  3. 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 round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  
Effective annual rate _____ %

b. Suppose your firm immediately uses $219 million of the line and pays it off in one year. What is the effective annual interest rate on this $219 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 ____% ?

Solutions

Expert Solution

a) Lets go with Simple Example
you Borrow $1000
$20 Compensation Balance which is 2% of funds actually borrowed
So total comes to $1020
Opening Balance [email protected]% Closing Balance
1st Quarter 1020.00 17.34 1037.34
2nd Quarter 1037.34 17.63 1054.97
3rd Quarter 1054.97 17.93 1072.91
4th Quarter 1072.91 18.24 1091.15
Total Interest 71.15
Effective Interest ='71.15/1000 7.11%
b) you Borrow $219 Million 223.849098
$ 4.38 Compensation Balance which is 2% of funds actually borrowed
$ 0.469 ((219*2%)*0.21%) commitment fee which is 0.21%funds actually borrowed
So total comes to $223.849098
Opening Balance [email protected]% Commitment fee 0.21% Closing Balance
1st Quarter 223.85 3.81 0.47 228.12
2nd Quarter 228.12 3.88 232.00
3rd Quarter 232.00 3.94 235.95
4th Quarter 235.95 4.01 239.96
Total Interest 15.64
Commitment fee is 0.21 on $210M
Effective Interest ='15.64/219 7.14%

jeff jeffy answered 1 year ago
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