need help calculating effective annual interest rate


S

shensi0525

Hi, could anyone help me please. thx very much.

You've worked out a line of credit arrangement that allows you to
borrow up to $45 million at any time. The interest rate is 0.61
percent per month. In addition, 3 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. The
effective annual interest rate on this lending arrangement is ______%.
Suppose you need $12 million today and you repay it in 6 months. You
will pay $ ______ in interest.

about the first one, i don't know how to calculate,
is it: ((1.0061)^12-1)/.97
or: ((1.0061)^12)/.97 - 1?

and the second, is it (12/.97) X ((1.0061)^6-1)?

pls...
 
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R

Ronald Raygun

Hi, could anyone help me please. thx very much.

You've worked out a line of credit arrangement that allows you to
borrow up to $45 million at any time. The interest rate is 0.61
percent per month. In addition, 3 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. The
effective annual interest rate on this lending arrangement is ______%.
Suppose you need $12 million today and you repay it in 6 months. You
will pay $ ______ in interest.

about the first one, i don't know how to calculate,
is it: ((1.0061)^12-1)/.97
or: ((1.0061)^12)/.97 - 1?
It's not good enough to know which one to use, you also have to know why.

But it's hardly rocket science. Why not use an example of borrowing
$1M (of which you then put away 3%) for a whole year, to help you
sort out the mechanics of it? It will then be obvious which of
the two answers is right (and indeed one of them is).
and the second, is it (12/.97) X ((1.0061)^6-1)?
Not quite, but you're on the right track.
 

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