question archive Cheap Money Bank offers your firm a discount interest loan at 8 percent for up to $25 million and, in addition, requires you to maintain a 6 percent compensating balance against the amount borrowed
Cheap Money Bank offers your firm a discount interest loan at 8 percent for up to $25 million and, in addition, requires you to maintain a 6 percent compensating balance against the amount borrowed
Subject:FinancePrice:2.84 Bought6
Cheap Money Bank offers your firm a discount interest loan at 8 percent for up to $25 million and, in addition, requires you to maintain a 6 percent compensating balance against the amount borrowed.
What is the effective annual interest rate on this lending arrangement? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Purchase A New Answer
Custom new solution created by our subject matter experts
GET A QUOTE
Answer Preview
Given,
Interest on Loan = 8 %
Loan Amount = $25 million = $25,000,000
6% Compensating Balance against the amount Borrowed
Hence,
Interest on Loan @ 8 % on $25 million = 8% x $25,000,000 = $2,000,000
Compensating Balance @ 6% on $25 million = 6% x $25,000,000 = $1,500,000
Total Cash Received = (Loan Amount - Interest on Loan - Compensating Balance )
Total Cash Received = $25,000,000 - $2,000,000 - $1,500,000
Total Cash Received = $21,500,000
Effective Interest Rate = (Interest on Loan/ Total Cash Received)
Effective Interest Rate = $2,000,000/$21,500,000
Effective Interest Rate = 9.30%
