Bhupinder's Bakery has a one-year $300,000 line of credit at an interest rate of 6% (EAR).The loan has a loan origination fee of 1%.What is the actual interest rate paid?

Question

Quizplus · Accepted Answer

First we need to calculate the loan origination fee:
Loan origination fee = $300,000 x 1% = $3,000
Next, we need to calculate the effective interest rate (EAR):
EAR = (1 + APR/n)^n - 1
where APR is the annual percentage rate, n is the number of times the interest is compounded in a year.
Here, APR = 6%, n = 1
EAR = (1 + 6%/1)^1 - 1 = 6.17%
Finally, we need to adjust the EAR for the loan origination fee using the following formula:
Adjusted EAR = [(1 + EAR)/(1 - Loan origination fee)] - 1
Adjusted EAR = [(1 + 6.17%)/(1 - 1%)] - 1 = 7.07%
Therefore, the actual interest rate paid is 7.07%, which is closest to option C (7.07%).

Bhupinder's Bakery Has a One-Year $300,000 Line of Credit at an Interest