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 is calculated by considering the compensating balance. The compensating balance is 3% of $169,000, which is $5,070. Therefore, the firm effectively borrows $169,000 - $5,070 = $163,930. The interest paid is 9% of $169,000, which is $15,210. The effective interest rate is $15,210 / $163,930 = 9.28%.

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