Question: Practice Problem #6 A company has a $10 million line of credit with a monthly interest rate of .75%. The company is required to maintain

Practice Problem #6 A company has a $10 million line of credit with a monthly interest rate of .75%. The company is required to maintain a 3% compensating balance on any funds used from the line of credit, which is deposited in a non-interest bearing account. Assume compound interest is used.

1. What is the effective annual interest rate on this lending arrangement?

2. Assume the company needs $970,000 today, which it plans to repay entirely a year from now. How much interest would the company save if the lender agrees to reduce the monthly interest rate by .25%? (Assume a 3% compensating balance on any funds actually borrowed would still be required)

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