Juno Industrial Supply has a $250,000 line of credit at a 9% interest rate. The loan agreement requires a 3% compensating balance, which is based on the total amount borrowed, and which will be held in an interest-free account. What is the effective interest rate if the firm borrows $169,000 on the line of credit for one year?

Question

Quizplus · Accepted Answer

The effective interest rate can be calculated by considering the interest paid and the compensating balance requirement. The interest paid is 9% of $169,000, which is $15,210. The compensating balance is 3% of $169,000, which is $5,070. This means the firm effectively has access to $169,000 - $5,070 = $163,930. The effective interest rate is the interest paid divided by the amount effectively available, which is $15,210 / $163,930 = 0.0928 or 9.28%.

Juno Industrial Supply Has a $250,000 Line of Credit at a 9