Kerry Corporation is planning to get a 270-day $500,000 simple interest loan from its bank at a quoted interest rate of 12 percent. If the bank has a 20% compensating balance requirement and Kerry currently holds no funds at the lending bank, what is the effective annual rate (eEAR) of the loan? (Assume there are 360 days in a year. Round your answer to two decimal places.)

Question

Quizplus · Accepted Answer

The effective annual rate (eEAR) is calculated by considering the compensating balance requirement. The actual loan amount available is $500,000 - 20% of $500,000 = $400,000. The interest for 270 days is $500,000 * 12% * (270/360) = $45,000. The eEAR is calculated as ($45,000 / $400,000) * (360/270) = 15.27%.

Kerry Corporation Is Planning to Get a 270-Day $500,000 Simple