Smith Enterprises has a line of credit with Fidelity National Bank that allows Smith to borrow up to $350,000 at an interest rate of 5%. However, Smith must keep a compensating balance of 10% of any amount borrowed on deposit at Fidelity. Smith does not normally keep a cash balance account with Fidelity. What is the effective annual cost of credit (round to nearest .01 percent)?
A) 5.93%
B) 5.84%
C) 5.64%
D) 5.56%

Question

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The Answer of Smith Enterprises has a line of credit with Fidelity National Bank that allows Smith to borrow up to $350,000 at an interest rate of 5%. However, Smith must keep a compensating balance of 10% of any amount borrowed on deposit at Fidelity. Smith does not normally keep a cash balance account with Fidelity. What is the effective annual cost of credit (round to nearest .01 percent)?
A) 5.93%
B) 5.84%
C) 5.64%
D) 5.56%

Smith Enterprises Has a Line of Credit with Fidelity National