Asked by matheus castro on Apr 28, 2024
Verified
A firm needs $45,000 to purchase inventory.The bank requires a 5% compensating balance.With a stated interest rate of 15%,what is the effective interest rate?
A) 14.25%
B) 15.00%
C) 15.79%
D) 16.67%
Effective Interest Rate
The real rate of interest earned or paid on a loan or investment, accounting for the effect of compounding over the period.
Compensating Balance
A minimum account balance that a borrower must maintain as a condition for borrowing from a lender or for obtaining favorable loan terms.
Stated Interest Rate
This refers to the nominal or advertised interest rate on a loan or financial product, not accounting for compounding or fees.
- Assess and evaluate the cost implications of diverse short-term financing methods.
Verified Answer
The interest on the loan will be:
$47,368 x 0.15 = $7,105.20
Thus, the effective interest rate can be found using the following formula:
Effective Interest Rate = Total Interest / Amount Borrowed
Effective Interest Rate = $7,105.20 / $45,000
Effective Interest Rate = 0.1579 or 15.79%
Therefore, the best choice is C.
Learning Objectives
- Assess and evaluate the cost implications of diverse short-term financing methods.
Related questions
Which of the Following Is Not a Source of Short-Term ...
Maria Wants to Start a Restaurant of Her Own ...
A Finance Company That Buys Other Companies' Accounts Receivable for ...
Which of the Following Is a Source of Short-Term Financing ...
If a Company Decides to Factor Its Receivables Without Recourse ...