Koopman's Chickens, Inc. plans to borrow $275,000 from its bank for one year. The annual rate of interest is 9%, but a compensating balance of 20% is required. What is the effective rate of interest?

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The effective rate of interest is 11.6%. This is because the compensating balance requirement means that Koopman's Chickens, Inc. will only have access to $220,000 of the $275,000 loan. The interest on the loan will still be $24,750, so the effective rate of interest is $24,750/$220,000 = 11.6%.