Scan Bookkeeping has a $200,000 compensating balance loan with its bank.The terms of the loan call for Scan to keep 5% of the loan as a compensating balance and pay interest at an annual rate of 6.50% on the entire amount.If the firm borrows the maximum amount for one year,what is the EAR on this loan?

Question

Quizplus · Accepted Answer

The effective annual rate (EAR) takes into account the effect of compounding on the stated interest rate. To calculate the EAR on this loan, we need to first find the amount of interest Scan will pay for the year:

Interest = $200,000 x 6.50% = $13,000

Next, we need to find the amount of the loan that Scan can actually use, after keeping the compensating balance:

Loan amount = $200,000 - (5% x $200,000) = $190,000

Now, we can use the loan amount and the interest paid to calculate the EAR:

EAR = (1 + Interest/Loan amount)^12/12 - 1
EAR = (1 + $13,000/$190,000)^12/12 - 1
EAR = 6.84%

Therefore, the best choice is D, with an EAR of 6.84%.

Scan Bookkeeping Has a $200,000 Compensating Balance Loan with Its