New Town Bank Offers You a $40,000 Line of Credit

New Town Bank offers you a $40,000 line of credit with an interest rate of 1.85 percent per quarter. The loan agreement also requires that 3 percent of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. Short-term investments are currently paying 1.1 percent per quarter. What is the effective annual interest rate on the line of credit if you borrow the entire $40,000 for one year? Assume any funds borrowed or invested use compound interest.

A) 4.47 percent
B) 4.58 percent
C) 7.61 percent
D) 7.78 percent
E) 12.33 percent