Would it be worth it to incur a compensating balance of $15,000 in order to get a 2-percent-lower interest rate on a 1-year,pure discount loan of $1,000,000? A)Yes B)No C)Not enough information is given to determine It depends upon whether $1,000,000 × (1 + i) or $1,015,000 × (1 + [i - 0.02]) is larger.The compensating balance for the lower loan rate will make sense if: $1,000,000 × (1 + i) $1,015,000 × (1 + [i - 0.02]) ($1,000,000/$1,015,000) × (1 + i) (1 + [i - 0.02]) 0)9852 + 0.9852i 1 + i - 0.02 -0)0148i -0.0052 I

Question

Would it be worth it to incur a compensating balance of $15,000 in order to get a 2-percent-lower interest rate on a 1-year,pure discount loan of $1,000,000?
A)Yes
B)No
C)Not enough information is given to determine It depends upon whether $1,000,000 × (1 + i) or $1,015,000 × (1 + [i - 0.02]) is larger.The compensating balance for the lower loan rate will make sense if:
$1,000,000 × (1 + i) > $1,015,000 × (1 + [i - 0.02])
($1,000,000/$1,015,000) × (1 + i) > (1 + [i - 0.02])
0)9852 + 0.9852i > 1 + i - 0.02
-0)0148i > -0.0052
I < 0.35135
In other words, only if the rate is less than 35.14 percent.Since this is likely to happen, the lower rate associated with the compensating balance is worth it.

Quizplus · Accepted Answer

The calculation shows that if the interest rate is less than 35.14 percent, then the lower rate associated with the compensating balance is worth it. Since this is likely to happen, it would be worth incurring the compensating balance of $15,000 to get a 2-percent-lower interest rate on a 1-year, pure discount loan of $1,000,000. Therefore, the answer is A) Yes.

Would It Be Worth It to Incur a Compensating Balance