Barter Company borrows $20,000 for one year a 9% interest,but must maintain a $1,600 compensating balance.The effective rate of interest on this loan is

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The effective rate of interest takes into account the interest rate as well as any other fees or requirements. In this case, the compensating balance of $1,600 is a requirement in order for Barter Company to borrow the $20,000. The amount of interest paid on the loan is ($20,000 x 0.09) = $1,800. However, since Barter Company must maintain the $1,600 compensating balance, they effectively only receive $18,400 in loan funds. Therefore, the true cost of the loan is ($1,800 / $18,400) = 0.0978 or 9.78%. Rounded to the nearest tenth, the effective rate of interest is 9.8%.

Barter Company Borrows $20,000 for One Year a 9% Interest,but