On January 1, 2007, Mann Company borrows $2,000,000 from National Bank at 11% annual interest.In addition, Mann is required to keep a compensatory balance of $200,000 on deposit at National Bank which will earn interest at 5%.The effective interest that Mann pays on its $2,000,000 loan is

Question

Quizplus · Accepted Answer

The compensatory balance of $200,000 doesn't earn any money for Mann, but it does reduce the amount that is subject to interest.

So, the interest expense for Mann is on $2,000,000 - $200,000 = $1,800,000.

The interest expense for the year is: 
$1,800,000 * 11% = $198,000

The interest income from the compensatory balance is: 
$200,000 * 5% = $10,000

The effective interest that Mann pays is: 
($198,000 - $10,000) / $1,800,000 = 10.89%

Rounding to one decimal place, the answer is 11.6%.

Therefore, the best choice is D.

On January 1, 2007, Mann Company Borrows $2,000,000 from National