Question

ROK-B borrowed (on average) $150,000 at a stated interest rate of 8% p.a. (per annum) for one year under a revolving credit agreement that authorized and guaranteed the firm access to $200,000. The bank charged the firm a commitment fee of 2% on the unused portion. If the compensating balance required (for the borrowed fund) is 15%, the EAR for this loan is _______%.

Answer 1

Line of credit allowed $200,000 $150,000 $1,000 $22,500 Amount borrowed (Credit utilized) Less: Commitment fees Less: Compensating balance Net Proceeds recieved Annual stated interest rate # of frequencies year Effective Interest dollars for 1 year Therefore, Effective Annual Rate (EAR) [($200,000-$150,000) x 296--> 2% on unused portion] [$150,000 x 15%) $126,500 I$150,000 $1,000 $22,500] 8% [lt is used for one year and there is 1 compounding in a year] $12,000 [$150,000 x ((1+896)1-1)] 9.49% [$12,000 / $126,500]