What is the effective rate of interest on a loan of $1 million if the bank charges 9% interest and requires a 10% compensating balance?

Question

Quizplus · Accepted Answer

The effective rate of interest is calculated by dividing the interest by the actual loan amount available after accounting for the compensating balance. Here, with a 10% compensating balance on a $1 million loan, $900,000 is actually available for use. The interest charged on the full amount ($1 million) at 9% is $90,000. Therefore, the effective rate is $90,000 / $900,000 = 10%.

What Is the Effective Rate of Interest on a Loan