Choi Exports is setting up a line of credit at its bank for $7.5 million for up

Question:

Choi Exports is setting up a line of credit at its bank for $7.5 million for up to three years. The interest rate is 7.875 percent and the loan agreement also calls for an annual fee of 50 basis points on any unused balance for the year. If the firm borrows $5 million on the day the loan agreement is signed, what is the loan’s effective interest rate?

Line of Credit
A line of credit (LOC) is a preset borrowing limit that can be used at any time. The borrower can take money out as needed until the limit is reached, and as money is repaid, it can be borrowed again in the case of an open line of credit. A LOC is...