Your firm has a line of credit with your local bank for $50,000. The loan agreement calls for interest of 9% with a 5% compensating balance requirement which is based on the total amount borrowed. What is the effective interest rate if you need $42,750 for one year to cover your operating expenses?

Question

Quizplus · Accepted Answer

To find the effective interest rate, calculate the actual amount available after the compensating balance: $42,750 / (1 - 0.05) = $45,000. The interest on $45,000 at 9% is $4,050. The effective interest rate is $4,050 / $42,750 = 9.47%.

Your Firm Has a Line of Credit with Your Local