You are getting a discount loan of $100,000 for 200 days with a stated annual interest rate of 6.5%. There is a required compensating balance of 15%. Calculate the effective interest rate.

Question

Quizplus · Accepted Answer

The effective interest rate can be calculated by first determining the interest amount, then adjusting for the compensating balance, and finally annualizing the interest rate for the specific period. The interest on the loan is calculated as $100,000 * 6.5% * (200/365) = $3,561.64. Since there's a required compensating balance of 15%, the effective loan amount is reduced to $100,000 - ($100,000 * 15%) = $85,000. The effective interest rate is then ($3,561.64 / $85,000) * (365/200) = 8.13%.

You Are Getting a Discount Loan of $100,000 for 200