Question

Your bank offers you a $40,000 line of credit with an interest rate of 1.75 percent per quarter. The loan agreement also requires that 2 percent of the unused portion of the credit line be deposited in a non-interest-bearing account as a compensating balance. Your short-term investments are paying .15 percent per month. What is your effective annual interest rate on this arrangement if you do not borrow any money on this credit line during the year? Assume any funds borrowed or invested use compound interest.


How do you get 1.81?

A.

7.19 percent

B.

1.81 percent

C.

3.18 percent

D.

.87 percent

E.

.60 percen

Answer 1

Answer:

1.81 percent

Explanation:

Your bank offers to pay a 40,000 line of credit with an interest of 1.75%

Your short term investments are paying 0.15% per month

Therefore the effective annual interest rate can be calculated as follows

= (short term investments/100 + 1)^12 - 1

= (0.15/100 + 1 )^12 -1

= (0.0015+ 1)^12 - 1

= 1.0015^12 - 1

= 1.0181 - 1

= 0.00181 × 100

= 1.81%

Hence the effective annual interest rate is 1.81 percent