Conways Roofing Services is offered a $1 million line of credit for three months at an APR of 8%. The bank requires that the firm keep an amount equal to 12% of the loan principal in a non-interest-earning account with the bank as long as the loan remains outstanding. What is the actual three-month interest rate paid, expressed as an EAR?

Question

Quizplus · Accepted Answer

A) Compensating balance = 0.12 × 1,000,000 = $120,000 Actual amount borrowed = $1,000,000 - $120,000 = $880,000 Total amount payable = $1,000,000 × (1 + 0.08 / 4) = $1,020,000 Amount owed = $1,020,000 - $120,000 = $900,000 Actual interest rate paid = 900,000/880,000 = 1.02273 Expressing as EAR = (1.02273⁴ - 1) = 9.41%

Conways Roofing Services Is Offered a $1 Million Line of Credit