The effective annual interest rate on a one-year, $1,000,000, 12% discount loan that requires a 10% compensating balance is

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The effective annual interest rate can be calculated by considering the actual amount received from the loan and the interest paid. For a $1,000,000 loan at a 12% discount rate, the interest amount is $120,000 ($1,000,000 * 12%). Since it's a discount loan, the borrower receives $880,000 ($1,000,000 - $120,000) upfront. However, with a 10% compensating balance, the borrower must keep $100,000 (10% of $1,000,000) in the account, effectively leaving them with $780,000 ($880,000 - $100,000) to use. The effective annual interest rate is the interest paid divided by the amount effectively used, which is $120,000 / $780,000 = 15.38%. However, since this option is not available, it appears there was a mistake in my calculation or interpretation of the options provided. Re-evaluating the calculation method or the understanding of the compensating balance and its impact on the effective amount available for use is necessary. The correct approach involves adjusting the formula or reassessing the impact of the compensating balance on the loan's effective cost.

The Effective Annual Interest Rate on a One-Year, $1,000,000, 12