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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14) Can i get help with this question please
![A bank offers your firm a revolving credit arrangement for up to $58 million at an interest rate of 1.45% per quarter. The bank also
requires you to maintain a compensating balance of 4% against the unused portion of the credit line, to be deposited in a non-interest-
bearing account. Assume you have a short-term investment account at the bank that pays .80% per quarter, and assume that the bank
uses compound interest on its revolving credit loans. (Do not round intermediate calculations. Round the final answers to 2 decimal
places.)
a. What is your effective annual interest rate (an opportunity cost) on the revolving credit arrangement if your firm does not use it
during the year?
Effective annual interest rate
%
b. What is your effective annual interest rate on the lending arrangement if you borrow $26 million immediately and repay it in one
year?
Effective annual interest rate
%
c. What is your effective annual interest rate if you borrow $58 million immediately and repay it in one year?
Effective annual interest rate
%](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F84393282-b929-4c46-8d27-d18c726dd70f%2F72d5815a-5150-4e3a-924b-0beb149e3f65%2Fvl2gc9z_processed.png&w=3840&q=75)
Transcribed Image Text:A bank offers your firm a revolving credit arrangement for up to $58 million at an interest rate of 1.45% per quarter. The bank also
requires you to maintain a compensating balance of 4% against the unused portion of the credit line, to be deposited in a non-interest-
bearing account. Assume you have a short-term investment account at the bank that pays .80% per quarter, and assume that the bank
uses compound interest on its revolving credit loans. (Do not round intermediate calculations. Round the final answers to 2 decimal
places.)
a. What is your effective annual interest rate (an opportunity cost) on the revolving credit arrangement if your firm does not use it
during the year?
Effective annual interest rate
%
b. What is your effective annual interest rate on the lending arrangement if you borrow $26 million immediately and repay it in one
year?
Effective annual interest rate
%
c. What is your effective annual interest rate if you borrow $58 million immediately and repay it in one year?
Effective annual interest rate
%
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