Gruppa, Inc., has just set up a formal line of credit of $10 million with First Community

Question:

Gruppa, Inc., has just set up a formal line of credit of $10 million with First Community Commercial Bank. The line of credit is good for up to five years. The bank will charge Gruppa an interest rate of 6.25 percent on any amount borrowed and the firm will pay an annual fee of 60 basis points on the unused balance. The firm borrowed $7.5 million on the first day the credit line became available. What is the firm’s effective interest rate on this line of credit?

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...