You’ve worked out a line of credit arrangement that allows you to borrow up to

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You’ve worked out a line of credit arrangement that allows you to borrow up to $45 million at any time. The interest rate is .45 percent per month. In addition, 5 percent of the amount that you borrow must be deposited in a noninterest-bearing account.  Assume that your bank uses compound interest on its line of credit loans.

Question Facts

Loan Max

45,000,000

Interest

0.0045

Compensating Balance%

0.05

Interest Type

Compounded

A.Effective Annual Interest Rate (Year)

Compensating Balance $

2,250,000

(Loan amount x Balance%)

Months

12

(Based on year)

Repayment

47,491,053.84

Total Cash Flow

45,241,053.84

Available Cash

42,750,000

Interest [EAR]

5.83%

(Total Cash/Available Cash) - 1

B. Suppose you need $15 million today and you repay it in 6 months. How much interest will you pay

Amount Required

15,000,000.00

Months

6

Amount to Borrow

15,789,473.68

(Required/(1-Compensating Balance %)

Interest

431,140.72

interest paid = Amount to borrow x (1 + interest rate) ^months  – Amount to borrow