Your Bank Offers You a $40,000 Line of Credit with an Interest

Your bank offers you a $40,000 line of credit with an interest rate of 1.75 percent per quarter.The loan agreement also requires that 2 percent of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance.Your short-term investments are paying 0.20 percent per month.What is your effective annual interest rate on this arrangement if you do not borrow any money on this credit line during the year? Assume any funds borrowed or invested use compound interest.

A) 2.00 percent
B) 2.43 percent
C) 3.18 percent
D) 7.00 percent
E) 7.19 percent