Assume that Ningbo Steel borrows $1,000,000 for one year under a line of credit with a stated interest rate of 7.5 percent and a 15 percent compensating balance and that the firm keeps no money on deposit in its checking account.Based on this information,the effective annual interest rate on the loan is

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The effective annual interest rate is calculated by dividing the interest by the usable funds. The interest is $75,000 (7.5% of $1,000,000), and the usable funds are $850,000 ($1,000,000 minus the 15% compensating balance of $150,000). The effective rate is $75,000 / $850,000 = 8.8%.

Assume That Ningbo Steel Borrows $1,000,000 for One Year Under