Question
In: Finance
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:
- 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 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% | |||||
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