# Effective Annual Interest Rate

You've worked out a line of credit arrangement that allows you borrow up to $70M at any time. The interest rate is .480% per month. In addition , 5% of the amount that you borrow must be deposited in a non interest-bearing account.

Assume that your bank uses compound interest on its line of credit loans.

1) What is the effective annual interest rate on this lending arrangement?

Answer should be: 6.23%

2) Suppose you need $15M today and you repay it in six months -

How much interest will you pay?

Answer: should be: 460,228.73

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#### Solution Preview

1) What is the effective annual interest rate on this lending arrangement?

Answer should be: 6.23%

When the fund is compounded monthly, we can compute its annual rate by:

R = (1+r)^12 - 1

Where the monthly rate is r = .48%, and ...

#### Solution Summary

Effective annual interest rate is calculated.