Stuart Mining Is Offered a $4,000,000 Line of Credit for Three

question 65

Multiple Choice

Stuart Mining is offered a $4,000,000 line of credit for three months at an APR of 6%. The bank requires that the firm keep an amount equal to 10% of the loan principal in an account with the bank as long as the loan remains outstanding. This account pays 2% APR with quarterly compounding. What is the actual three-month interest paid on this loan?

• A) 1.6%
• B) 6.6%
• C) 12.6%
• D) 14.6%
• E) 60.9%

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Definitions:

Mental Accounting

The tendency people have to create separate “mental boxes” (or “accounts”) in which they deal with particular financial transactions in isolation rather than dealing with them as part of an overall decision-making process that would consider how to best allocate their limited budgets across all possible options by using the utility-maximizing rule.

Overpriced Warranties

Service contracts sold at a price significantly higher than the expected cost of repairs, often criticized for their value relative to the benefits provided.

Losses

The negative financial result from business activities when costs exceed revenues.

Gains

Increases in economic benefits, such as profit, revenue, or utility, often resulting from investments, trade, or improvements in productivity.