Palm Beach Yachts has a line of credit with a local bank that permits it to borrow up to $1.8 million at any time.The interest rate is .78 percent per month.The bank charges compound interest and also requires that 5 percent of the amount borrowed be deposited into a non-interest-bearing account.What is the effective annual interest rate on this loan?

Question

Quizplus · Accepted Answer

The effective annual interest rate (EAR) can be calculated using the formula for compound interest, taking into account the monthly interest rate and the requirement to deposit 5% of the borrowed amount into a non-interest-bearing account. The monthly interest rate is 0.78%, and the effective monthly rate considering the 5% deposit is higher. Calculating the EAR using these factors results in approximately 10.29%.

Palm Beach Yachts Has a Line of Credit with a Local