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What is the effective annual rate

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A firm has a $200,000 line of credit with a 4% compensating balance requirement. The quoted rate on the line is prime +5%, and the prime rate is currently 2.5%. What is the effective annual rate (EAR)?

Note: You don't need to know how much the firm borrows, the EAR will be the same for all borrowings $200,000 or less. However for convenience in calculations, you may assume that the firm borrows $100,000.

Reference no: EM132703678

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