Question: Costs of Borrowing. 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 .485 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.
a. What is the effective annual interest rate on this lending arrangement?
b. Suppose you need $15 million today and you repay it in six months. How much interest will you pay?