Xu Salon has a line of credit of $150,000 with an interest rate of 1.625 percent per quarter. The credit line requires that 2.25 percent of the unused portion of the credit line be deposited in a non-interest-bearing account as a compensating balance. Xu Salon's short-term investments are earning .35 percent per quarter. If the line of credit goes unused all year, what is the effective annual interest rate on this arrangement? Assume any funds borrowed or invested use compound interest.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Xu Salon has a line of credit of $150,000 with an interest rate of 1.625 percent per quarter. The credit line requires that 2.25 percent of the unused portion of the credit line be deposited in a non-interest-bearing account as a compensating balance. Xu Salon's short-term investments are earning .35 percent per quarter. If the line of credit goes unused all year, what is the effective annual interest rate on this arrangement? Assume any funds borrowed or invested use compound interest.

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