1) Bank offers your firm revolving credit arrangement for up to $68 million at the interest rate of 1.41% per quarter. Bank also needs you to sustain a compensating balance of 6% against unused portion of credit line, to be deposited in the noninterest-bearing account. Suppose you have a short-term investment account at bank which pays .82% per quarter, and suppose that bank utilizes compound interest on its revolving credit loans. Determine the effective annual interest rate (an opportunity cost) on revolving credit arrangement if your firm doesn’t utilize it during the year? Determine the effective annual interest rate on lending arrangement if you borrow= $47 million immediately and repay it in one year? Find out the effective annual interest rate if you borrow= $68 million immediately and repay it in 1 year?
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