Question: In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following: 1. Pay 1.85 percent per quarter

In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following:
1. Pay 1.85 percent per quarter on any funds actually borrowed.
2. Maintain a compensating balance of 5 percent on any funds actually borrowed.
3. Pay an up-front commitment fee of .165 percent of the amount of the line.

Based on this information, answer the following:
a. Ignoring the commitment fee, what is the effective annual interest rate on this line of credit?
b. Suppose your firm immediately uses $150 million of the line and pays it off in one year. What is the effective annual interest rate on this $150 million loan?

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