Effective Annual Interest Rate
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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 Summary
Effective annual interest rate is calculated.
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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 ...
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