Lulwa Industries has a line of credit at Bank Two that requires it to pay 11 percent

Question:

Lulwa Industries has a at Bank Two that requires it to pay 11 percent interest on its borrowing and to maintain a compensating balance equal to 15 percent of the amount borrowed. The firm has borrowed US$800,000 during the year under the agreement. Calculate the effective annual rate on the firm's borrowing in each of the following circumstances:
a. The firm normally maintains no deposit balances at Bank Two.
b. The firm normally maintains US$70,000 in deposit balances at Bank Two.
c. The firm normally maintains US$150,000 in deposit balances at Bank Two.
d. Compare, contrast, and discuss your findings in parts a, b, and c.
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...