If a lender makes a $100,000 loan at a 10 percent stated interest rate but requires a $5,000 compensating balance, the effective annual interest rate is

Question

Quizplus · Accepted Answer

The effective interest rate is calculated by considering the compensating balance. The borrower effectively receives $95,000 ($100,000 - $5,000) but pays interest on the full $100,000. The interest paid is $10,000 (10% of $100,000), so the effective interest rate is $10,000 / $95,000 = 10.5%.

If a Lender Makes a $100,000 Loan at a 10