-The effective annual interest rate on a loan in which a company borrows $1,000,000 for one year at 8 percent and requires a compensating balance of 10 percent is:

Question

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The effective interest rate is calculated by considering the actual amount available for use after the compensating balance. The compensating balance is 10% of $1,000,000, which is $100,000. Therefore, the company effectively borrows $900,000. The interest paid is $80,000 (8% of $1,000,000). The effective interest rate is $80,000 / $900,000 = 8.89%.

-The Effective Annual Interest Rate on a Loan in Which