Jim's Electrical is offered a $400,000 line of credit for six months at an APR of 9%. The bank requires that the firm keep an amount equal to 5% of the loan principal in a non-interest-earning account with the bank as long as the loan remains outstanding. What is the actual six-month interest rate paid, expressed as an EAR?

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Quizplus · Accepted Answer

C) Compensating balance = 0.05 × 400,000 = $20,000 Actual loan amount = $400,000 - $20,000 = $380,000 Total amount payable = $400,000 × (1 + 0.09 / 2) = $418,000 Amount owed = $418,000 - $20,000 = $398,000 Actual interest rate paid = 398,000 / 380,000 = 1.04737 Expressing as EAR = (1.04737² - 1) = 9.70%

Jim's Electrical Is Offered a $400,000 Line of Credit for Six