Asked by Ashley Hammerscchmidt on Jul 12, 2024
Verified
What is the effective rate on an 8% loan subject to a 10% minimum compensating balance
A) 10.0%
B) 8.0%
C) 8.89%
D) None of the above
Compensating Balance
A minimum account balance that a company agrees to maintain in a bank account, often to qualify for favorable terms on a loan from the bank.
Effective Rate
The interest rate on a loan or investment, adjusted for the compounding period, providing a true reflection of financial costs or returns.
- Ascertain the effective interest rate while including considerations for compensating balances.
Verified Answer
EM
Emmanuel MesiaJul 17, 2024
Final Answer :
C
Explanation :
The effective rate formula with minimum compensating balance is:
Effective rate = (Interest paid / Loan proceeds) * (1 - minimum compensating balance)
= (8% / 0.9) * (1 - 0.1)
= 0.0889 or 8.89%
Effective rate = (Interest paid / Loan proceeds) * (1 - minimum compensating balance)
= (8% / 0.9) * (1 - 0.1)
= 0.0889 or 8.89%
Learning Objectives
- Ascertain the effective interest rate while including considerations for compensating balances.
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