Question

Kurt's Music has a line of credit with a local bank that permits it to borrow up to $650,000 at any time. The interest rate is .64 percent per month. The bank charges compound interest and also requires that 2 percent of the amount borrowed be deposited into a non-interest-bearing account. How much interest will the firm pay if it needs $200,000 of cash for three months to pay its operating expenses

Answer 1

Answer:

Kurt's Music

The firm will pay interest amounting to $8,025.51 if it needs $200,000.

Explanation:

a) Data and Calculations:

Line of credit with bank = $650,000

Interest rate = 0.64 percent per month compounded monthly

Deposit requirement = 2% of borrowed fund

If the firm needs $200,000 for operating expenses, it will borrow $200,000 /0.98 = $204,082

Borrowed fund + Interest on $204,082 * (1 + 0.0064)³ = $208,025.51

Therefore, the interest = $8,025.51 ($208,025.51 - $200,000)

FV (Future Value) $208,025.51

PV (Present Value) $204,082.00

N (Number of Periods) 3.000

I/Y (Interest Rate) 0.640%