Tangshan Mining borrowed $100,000 for one year under a line of credit with a stated interest rate of 7.5 percent and a 15 percent compensating balance. Normally, the firm keeps a balance of about $10,000 in its checking account. Based on this information, the effective annual interest rate on the loan was ________ percent.
A) 7.89%
B) 8.05%
C) 8.89%
D) 7.29%

Question

Quizplus · Accepted Answer

The effective annual interest rate on the loan is 7.89%.The compensating balance is 15% of $100,000, which is $15,000. The firm keeps a balance of $10,000 in its checking account, so the effective balance is $15,000 - $10,000 = $5,000. The effective annual interest rate is 7.5% * $100,000 / $95,000 = 7.89%.

Tangshan Mining Borrowed $100,000 for One Year Under a Line