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Discuss problem related to the costs of borrowing

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Question: Costs of Borrowing. In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following:

1. Pay 1.73 percent per quarter on any funds actually borrowed.

2. Maintain a 5 percent compensating balance on any funds actually borrowed.

3. Pay an up-front commitment fee of .25 percent of the amount of the line. Based on this information, answer the following:

a. Ignoring the commitment fee, what is the effective annual interest rate on this line of credit?

b. Suppose your firm immediately uses $210 million of the line and pays it off in one year. What is the effective annual interest rate on this $210 million loan?

Reference no: EM131733209

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