Kurt's Music Has a Line of Credit with a Local

question 44

Multiple Choice

Kurt's Music has a line of credit with a local bank that permits it to borrow up to $650,000 at any time.The interest rate is .64 percent per month.The bank charges compound interest and also requires that 2 percent of the amount borrowed be deposited into a non-interest-bearing account.How much interest will the firm pay if it needs $200,000 of cash for three months to pay its operating expenses?

• A)$3,943.50
• B)$3,949.21
• C)$4,017.02
• D)$3,864.63
• E)$3,902.11

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Definitions:

Annual Coupon

The annual coupon is the interest payment that a bond issuer makes to bondholders each year, expressed as a percentage of the bond's face value.

Price

The amount of money required to purchase a good, service, or asset.

Maturity

The time at which a financial instrument becomes due for payment.

Liquidity Premium (LP)

Additional return demanded by investors for holding securities with lower liquidity, compensating for the potential cost and difficulties in trading.