Your Bank Offers You a $40,000 Line of Credit with an Interest

Multiple Choice

Your bank offers you a $40,000 line of credit with an interest rate of 2.35% per quarter. The loan agreement also requires that 5% 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 1.75% per quarter. What is your effective annual interest rate if you borrow the whole $40,000 for the entire year? Assume that both the funds you borrow and the funds you invest use compound interest.

A) 9.40%
B) 9.63%
C) 9.74%
D) 9.82%
E) 9.87%