Your ﬁrm has a line of credit with your local bank for £50,000.The loan agreement calls for interest of 9% with a 5% compensating balance requirement which is based on the total amount borrowed.
What is the effective interest rate if you need £42,750 for one year to cover your operating
Expenses?

Question

Quizplus · Accepted Answer

To find the effective interest rate, calculate the actual amount available after the compensating balance and then determine the interest paid on the actual amount used. The compensating balance is 5% of £42,750, which is £2,250. Therefore, the actual amount available is £42,750 - £2,250 = £40,500. The interest paid on £42,750 at 9% is £3,847.50. The effective interest rate is £3,847.50 / £40,500 = 9.47%.

Your ﬁRm Has a Line of Credit with Your Local