Problemyour bank offers you a 40000 line of credit with an, Ask an Expert

Accounting

Problem:

Your bank offers you a $40,000 line of credit with an interest rate of 2.35% per quarter. The loan agreement also requires that 5% 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 1.75% per quarter.

Required:

Question: What is your effective annual interest rate if you borrow the whole $40,000 for the entire year? Assume that both the funds you borrow and the funds you invest use compound interest.

9.40%
9.63%
9.74%
9.82%
9.87%

Note: Please provide through step by step calculations.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91169878

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