A Firm Borrows $7 Million Through a Credit Line and Is

question 40

Essay

A firm borrows $7 million through a credit line and is required to keep $350,000 as a compensating balance. The credit line carries a 11% interest rate. Calculate the effective interest rate on the loan if it is repaid after 1 year.

---

Definitions:

Cloth

A flexible material made by weaving, knitting, pressing, or bonding fibers together, used for making items like clothing, drapery, or bedding.

Wire Surrogate

Reference to an experiment in developmental psychology by Harry Harlow, which showed that infant monkeys preferred a cloth-covered surrogate mother to a wire one, even when the latter provided food, highlighting the importance of comfort and security in attachment.

Attachment Formation

The process by which an emotional bond is developed between a child and a caregiver, significantly influencing the child's social and emotional development.

Goodness of Fit

A term in developmental psychology that describes how well an individual's temperamental traits match the expectations and demands of their social environment.