(Related to Checkpoint 18.2) (Calculating the cost of a short-term bank loan) On July 1, 2016, the Southwest Forging Corporation arranged for a line of credit with the First National Bank (FNB) of Dallas. The terms of the agreement call for a $100,000 maximum loan with interest set at 1 percent over prime. In addition, the firm has to maintain a 22 percent compensating balance in its demand deposit account throughout the year. The prime rate is currently 6 percent (assume a 360-day year). a. If Southwest normally maintains a $22,000 to $32,000 balance in its checking account with FNB of Dallas, what is the annualized cost of credit through the line-of-credit agreement when the maximum loan amount is used for a full year? a. If Southwest normally maintains a $22,000 to $32,000 balance in its checking account with FNB of Dallas, the effective cost of credit under the line-of-credit agreement when the maximum loan amount is used for a full year is %. (Type a whole percentage.)
(Related to Checkpoint 18.2) (Calculating the cost of a short-term bank loan) On July 1, 2016, the Southwest Forging Corporation arranged for a line of credit with the First National Bank (FNB) of Dallas. The terms of the agreement call for a $100,000 maximum loan with interest set at 1 percent over prime. In addition, the firm has to maintain a 22 percent compensating balance in its demand deposit account throughout the year. The prime rate is currently 6 percent (assume a 360-day year). a. If Southwest normally maintains a $22,000 to $32,000 balance in its checking account with FNB of Dallas, what is the annualized cost of credit through the line-of-credit agreement when the maximum loan amount is used for a full year? a. If Southwest normally maintains a $22,000 to $32,000 balance in its checking account with FNB of Dallas, the effective cost of credit under the line-of-credit agreement when the maximum loan amount is used for a full year is %. (Type a whole percentage.)
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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M7Q8A
Transcribed Image Text:(Related to Checkpoint 18.2) (Calculating the cost of a short-term bank loan) On July 1, 2016, the Southwest Forging Corporation arranged
for a line of credit with the First National Bank (FNB) of Dallas. The terms of the agreement call for a $100,000 maximum loan with interest set at 1
percent over prime. In addition, the firm has to maintain a 22 percent compensating balance in its demand deposit account throughout the year.
The prime rate is currently 6 percent (assume a 360-day year).
a. If Southwest normally maintains a $22,000 to $32,000 balance in its checking account with FNB of Dallas, what is the annualized cost of credit
through the line-of-credit agreement when the maximum loan amount is used for a full year?
a. If Southwest normally maintains a $22,000 to $32,000 balance in its checking account with FNB of Dallas, the effective cost of credit under the
line-of-credit agreement when the maximum loan amount is used for a full year is %. (Type a whole percentage.)
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M7 Question 8 (B)
Transcribed Image Text:(Related to Checkpoint 18.2) (Calculating the cost of a short-term bank loan) On July 1, 2016, the Southwest Forging Corporation arranged for a line of credit with the First National Bank (FNB) of Dallas. The terms of the agreement call for a $100,000
maximum loan with interest set at 1 percent over prime. In addition, the firm has to maintain a 22 percent compensating balance in its demand deposit account throughout the year. The prime rate is currently 6 percent (assume a 360-day year).
a. If Southwest normally maintains a $22,000 to $32,000 balance in its checking account with FNB of Dallas, what is the annualized cost of credit through the line-of-credit agreement when the maximum loan amount is used for a full year?
b. Recompute the annualized cost of credit to Southwest if the firm borrows the compensating balance and also borrows the maximum possible under the loan agreement. Again, assume the full amount of the loan is outstanding for a whole year.
a. If Southwest normally maintains a $22,000 to $32,000 balance in its checking account with FNB of Dallas, the effective cost of credit under the line-of-credit agreement when the maximum loan amount is used for a full year is 7%. (Type a whole
percentage.)
b. If the firm borrows the compensating balance and also the maximum possible amount under the loan agreement, the effective cost of credit, APR is %. (Round to two decimal places.)
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