The effective rate on a loan with a 7% stated rate and 15% compensating balance is approximately ______.
A)11%
B)7.2%
C)8.2%
D)None of these options

Question

Quizplus · Accepted Answer

To calculate the effective rate with a compensating balance, we need to first calculate the amount of funds that will be held in the account to satisfy the compensating balance requirement.

For example, if we take out a $10,000 loan with a 15% compensating balance, we need to keep 15% of the loan amount ($1,500) in a deposit account. This means we only receive $8,500 in loan proceeds.

Next, we need to calculate the interest paid on the full amount of the loan ($10,000) at the stated rate (7%).

Interest = $10,000 x 7% = $700

Finally, we divide the total interest paid by the net amount of the loan proceeds ($700/$8,500) to get the effective rate:

Effective rate = 8.2%

Therefore, the best choice is C.

The Effective Rate on a Loan with a 7% Stated