a) What is the bank’s effective yield on the line? b) What is the borrower’s effective cost? c) Suppose the borrower wants to exchange compensating balances for a higher interest rate, what would be the new rate of interest?
a) What is the bank’s effective yield on the line? b) What is the borrower’s effective cost? c) Suppose the borrower wants to exchange compensating balances for a higher interest rate, what would be the new rate of interest?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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ABC Corporation got a $45 million line of credit of which it is expected to use 65%. ABC was given an 9% interest rate with a 1% front-end fee and a 1/2% commitment fee on the unused balances; a 7% compensating balance on any usage plus a 5% compensating balance on the total line. (The compensating balances earn zero interest.) The bank has a 15% reserve requirement. a) What is the bank’s effective yield on the line? b) What is the borrower’s effective cost? c) Suppose the borrower wants to exchange compensating balances for a higher interest rate, what would be the new rate of interest?
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