Would it be worth it to incur a compensating balance of $9,000 in order to get a .70-percent-lower interest rate on a 1-year, pure discount loan of $250,000? A) yes B) no C) not enough information is given to determine The repayment on the $250,000 loan without the compensating balance would be $250,000 x (1 + i), vs. $259,000 x (1 + [i - .007]): $250,000 x (1 + i) $259,000 x (1 + [i - .007]) ($250,000/$259,000) x (1 + i) (1 + [i -.007]) )9653 + .9653i 1 + i - .007 -)0347i .0277 I

Question

Would it be worth it to incur a compensating balance of $9,000 in order to get a .70-percent-lower interest rate on a 1-year, pure discount loan of $250,000?
A) yes
B) no
C) not enough information is given to determine The repayment on the $250,000 loan without the compensating balance would be $250,000 x (1 + i), vs. $259,000 x (1 + [i - .007]):
$250,000 x (1 + i) > $259,000 x (1 + [i - .007])
($250,000/$259,000) x (1 + i) > (1 + [i -.007])
)9653 + .9653i > 1 + i - .007
-)0347i > .0277
I < -.7983
In other words, only if the rate is less than - 79.83%. Since this is not likely to happen, the lower rate associated with the compensating balance isn't worth it.

Quizplus · Accepted Answer

The calculation shows that the interest rate would need to be less than -79.83% for it to be worth incurring a $9,000 compensating balance, which is not a realistic scenario. Therefore, it is not worth incurring the compensating balance to get the lower interest rate.

Would It Be Worth It to Incur a Compensating Balance