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

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A) The origination fee is charged on the principal of the loan. The amount of the compensating balance is equal to 0.10 × $1,000,000 = $100,000. The actual proceeds from the loan = $1,000,000 - $100,000 = $900,000. The interest on the loan equals $1,000,000 × 11ea84dc_f4e5_e4ee_9a63_0f3e1abeeb17_TB1316_11_TB1316_11 × 4 months = $30,000. The actual four month interest rate is: 11ea84dc_f4e6_0bff_9a63_e1787e8d11c4_TB1316_11_TB1316_11 - 1 = 0.03333 or 3.333%. Expressing as an EAR = 1.03333^(12/4) - 1 = 0.1033 or 10.33%.

Luther Industries Is Offered a $1 Million Loan for Four