You've worked out a line of credit arrangement that allows you to borrow up to $2.5 million at any time.The interest rate is .65 percent per month.In addition,2 percent of the amount you borrow must be deposited in a non-interest-bearing account.Assume your lender uses compound interest and that you need $1.2 million today which you will repay in five months.How much interest will you pay?

Question

Quizplus · Accepted Answer

The interest rate per month is 0.65% and it is compounded monthly. So, the effective interest rate will be (1+0.0065)^12 - 1 = 0.0833 = 8.33%.

The amount of interest will depend on how much you borrow and for how long. In this case, you are borrowing $1.2 million and repaying it in 5 months.

The amount you need to deposit in the non-interest bearing account will be 2% of $1.2 million = $24,000.

The total amount you will owe after 5 months will be:

$1,200,000 + $1,200,000*8.33/100*5 = $1,320,660

The interest you will pay is the difference between the amount you borrowed and the amount you will repay:

$1,320,660 - $1,200,000 - $24,000 = $96,660

So, the answer is B) $40,317.

You've Worked Out a Line of Credit Arrangement That Allows