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You've worked out a line of credit arrangement that allows you to borrow up to $40 million at any time. The interest rate is 48 percent per month In addition. 5 percent of the amount that you borrow must be deposited in a noninterest-bearing account Assume that your bank uses compound interest on its line of credit loans. What is the effective annual interest rate on this lending arrangement

Sagot :

Answer:

The effective annual interest rate on this lending arrangement is 10,944.36%.

Explanation:

The effective annual rate (EAR) can be calculated using the following formula:

EAR = ((1 + i)^n) - 1 .............................(1)

Where;

i = Monthly interest rate of the bank = 48%, or 0.48

n = Number of compounding periods in a year = 12

Substituting the values into equation (1), we have:

EAR = ((1 + 0.48)^12) - 1

EAR = 1.48^12 - 1

EAR = 110.443607719612 - 1

EAR = 109.443607719612, or 10,944.3607719612%

Rounding to 2 decimal places, we have:

EAR = 10,944.36%

Therefore, the effective annual interest rate on this lending arrangement is 10,944.36%.

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