Arthur Company borrows $20,000 for one year a 9% interest, but must maintain a $1,600 compensating balance. The effective rate of interest on this loan is

Question

Quizplus · Accepted Answer

The effective rate of interest takes into account the required compensating balance. To find the effective rate of interest, first calculate the interest paid on the loan:
$20,000 x 0.09 = $1,800
Next, subtract the required compensating balance from the amount borrowed:
$20,000 - $1,600 = $18,400
Then calculate the percentage of interest paid on the effective amount borrowed:
$1,800 / $18,400 = 0.0978 or 9.78%
Therefore, the effective rate of interest is 9.78%.

Arthur Company Borrows $20,000 for One Year a 9% Interest