Your Bank Offers You a $100,000 Line of Credit with an Interest

Multiple Choice

Your bank offers you a $100,000 line of credit with an interest rate of 2.5% per quarter. The loan agreement also requires that 4% of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. Your short-term investments are paying 1.25% per quarter. What is your effective annual interest rate if you borrow the whole $100,000 for the entire year? Assume that both the funds you borrow and the funds you invest use compound interest.

A) 10.00%
B) 10.25%
C) 10.38%
D) 10.50%
E) 10.67%