In order to borrow $100,000 for a 5% loan on a discount loan basis with a 5% compensating balance; the firm will actually have to borrow:

Question

Quizplus · Accepted Answer

When borrowing on a discount loan basis with a compensating balance, the borrower must borrow an amount greater than the desired loan amount in order to meet the compensating balance requirement.

To find the actual amount the firm will have to borrow, we can use the following formula:

Actual loan amount = desired loan amount / (1 - compensating balance rate)

In this case: 
Desired loan amount = $100,000 
Compensating balance rate = 5%

Actual loan amount = $100,000 / (1 - 0.05) 
= $105,263

Therefore, the answer is B) $111,111, which is the closest amount to $105,263 that is a multiple of $1,000.

In Order to Borrow $100,000 for a 5% Loan on a Discount