Problem:
Your bank offers you a $40,000 line of credit with an interest rate of 2.35% per quarter. The loan agreement also requires that 5% of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. Your short-term investments are paying 1.75% per quarter.
Required:
Question: What is your effective annual interest rate if you borrow the whole $40,000 for the entire year? Assume that both the funds you borrow and the funds you invest use compound interest.
- 9.40%
- 9.63%
- 9.74%
- 9.82%
- 9.87%
Note: Please provide through step by step calculations.