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Question
Crenshaw Inc. has a $400,000 line of credit with a local bank. The bank requires a compensating balance of 10% of the loan and extends credit to Crenshaw at 1% over the current prime rate. Crenshaw needs the use of $200,000 for the three-month period. They currently have no deposits with the lending bank.a. What will the effective annual cost of this credit be? (Assume a 360-day year and a 9% prime rate.)
b. Using the above information, what would be the effective interest rate if the firm discounted the interest on the loan?
Answer
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