Penn Inc.needs to borrow $250,000 for the next 6 months.The company has a line of credit with a bank that allows the company to borrow funds with an 8% interest rate subject to a 20% of loan compensating balance.Currently,Penn Inc.has no funds on deposit with the bank and will need the loan to cover the compensating balance as well as their other financing needs.What will be the annual percentage rate,or APR,for this financing?

Question

Quizplus · Accepted Answer

The correct answer is A because the APR is 10.00%. The compensating balance is 20% of the loan amount, which is $50,000. The interest on the loan is $10,000. The total cost of the loan is $15,000. The APR is the total cost of the loan divided by the loan amount, which is 10.00%.

Penn IncNeeds to Borrow $250,000 for the Next 6 Months