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

question 101

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 on this arrangement if you do not borrow any
Money on this credit line during the year? Assume that both the funds you borrow and the funds
You invest use compound interest.

• A)5.00%
• B)5.05%
• C)5.09%
• D)5.13%
• E)5.25%

---

Definitions:

Classical Decision Theory

A theory that describes decision-making with an emphasis on rationality, where the decision maker is aware of all alternatives and their outcomes.

Rational Choices

Refers to decisions made after thoroughly considering the available options and their outcomes, based on logic and reason.

Certain World

A theoretical scenario in which all variables and outcomes are known and predictable, unlike the uncertainty of the real-world environment.

Complete Information

A situation in economic theory where all parties have all the necessary information to make an informed decision.