New york bank provides food canning, inc. a $250,000 line of credit with an interest rate of 1.75 percent per quarter. the credit line also requires that 1 percent of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. food canning, inc.'s short-term investments are paying 1.2 percent per quarter. what is the effective annual interest rate on this arrangement if the line of credit goes unused all year

effective interest rate: 2.37%

Explanation:

250,000 x 1% = 2,500

We will calcualtethe interest expense for the credit line and the interest revneue for the credit being in short-term investment through the whole year

so we got:

Principal250,000.00

time4.00

rate0.00175

Amount267,964.76

interst expense for the credit line  17.964.76

2,500 will be deposited

if we keep the credit line available through short term investment we will got:

Principal247,500.00

time4.00

rate0.01200

Amount259,595.56

interest revenue 12.095,56‬

so we recieve 247,500

and paid 17.964.76 interest

and gain 12.095,56‬

interest net: 5.869,2‬

5,869.2/247,500 =0,02371393 = 2.37%