Smith Enterprise Credit Line
Smith Enterprise has a one year credit line of $5,000,000 with Second Bank. On average Smith uses $3,250,000 of the credit line. Second Bank charges a .45% commitment fee on the unused portion of the line and the interest rate is set at LIBOR +1.5%. The bank also requires a 5% compensating balance.

-If Smith needs to borrow $3,250,000,what is the effective borrowing rate if the LIBOR equals 6.3%?

Question

Smith Enterprise Credit Line
Smith Enterprise has a one year credit line of $5,000,000 with Second Bank. On average Smith uses $3,250,000 of the credit line. Second Bank charges a .45% commitment fee on the unused portion of the line and the interest rate is set at LIBOR +1.5%. The bank also requires a 5% compensating balance.

-If Smith needs to borrow $3,250,000,what is the effective borrowing rate if the LIBOR equals 6.3%?

Quizplus · Accepted Answer

loan out = 3250000/(1-.05)= 3421053 (incl.comp balance)
EBB = {(.078´3421053)+[.0045(5000000-3421053)]}/3250000 ´ 365/365 = .0843