Problem:
Juno Industrial Supply has a $150,000 line of credit with a 6.5 percent interest rate. The loan agreement requires a 2 percent compensating balance, which is based on the total amount borrowed, and which will be held in an interest-free account.
Required:
Question: What is the effective interest rate if the firm borrows $91,800 on the line of credit for one year?
A. 6.42 percent
B. 6.47 percent
C. 6.50 percent
D. 6.58 percent
E. 6.63 percent
Note: Be sure to show how you arrived at your answer.