Luther Industries is offered a $1 million loan for four months at an APR of 9%.If Luther's bank requires that the firm maintain a compensating balance equal to 10% of the loan amount in a non-interest-earning account,then the effective annual rate EAR for this loan is closest to:

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) is the true cost of a loan, taking into account the compounding of interest. The EAR for a loan with a compensating balance is given by the following formula:EAR = (1 + (APR / m))^m - 1where:APR is the annual percentage ratem is the number of compounding periods per yearIn this case, the APR is 9% and the loan is for four months, so m = 3. Plugging these values into the formula, we get:EAR = (1 + (0.09 / 3))^3 - 1 = 0.103 = 10.3%Therefore, the effective annual rate for this loan is closest to 10.3%.

Luther Industries Is Offered a $1 Million Loan for Four