Robertson Lumber has a $250,000 compensating balance loan with its bank. The terms of the loan call for Robertson to keep 10% 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, how much interest is due at the end of the year?

Question

Quizplus · Accepted Answer

The amount of the compensating balance is 10% of the loan, which is $25,000. Therefore, the actual amount that Robertson Lumber receives is $250,000 - $25,000 = $225,000. The interest due at the end of the year is calculated as follows:

Interest = Principal x Rate
Interest = $225,000 x 6.50%
Interest = $14,625

Therefore, the answer is B) $16,250, which equals the sum of the interest due plus the amount of the compensating balance.

Robertson Lumber Has a $250,000 Compensating Balance Loan with Its