Asked by Kylie Burchett on Jul 09, 2024
Verified
Haverly, Inc. has borrowed $100,000. The loan is subject to a 10% compensating balance and has an effective interest rate of 13.33%. Calculate the quoted interest rate on the loan. (Round to nearest whole percent)
A) 10%
B) 11%
C) 12%
D) 13%
Compensating Balance
A minimum balance that must be maintained in a bank account, often required by banks in return for loans or as part of a service agreement.
Effective Interest Rate
The actual interest rate on a loan or investment, taking into account the effect of compounding, fees, and other factors, more accurately reflecting the true cost or yield than the nominal rate.
Quoted Interest Rate
The interest rate that a lender provides to a borrower, usually expressed as an annual percentage of the loan amount.
- Compute the effective interest rate on borrowings and grasp how it affects choices in financing.
Verified Answer
Compensating balance = $100,000 x 10% = $10,000
Total amount borrowed = $100,000 + $10,000 = $110,000
Effective interest rate = 13.33%
Quoted interest rate = (effective interest rate / (1 - compensating balance rate))
Quoted interest rate = (0.1333 / 0.9)
Quoted interest rate = 0.1481 or 14.81%
Rounded to the nearest whole percent, the quoted interest rate is 12%.
Learning Objectives
- Compute the effective interest rate on borrowings and grasp how it affects choices in financing.
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