Heintz Corporation wishes to borrow $83,000 at 11% interest from the local bank.However,the bank requires a compensating balance of 10%.The effective interest rate that Heintz Corporation will pay on the loan is which of the following?

Question

Quizplus · Accepted Answer

The effective interest rate can be calculated by dividing the annual interest by the net amount available after maintaining the compensating balance. The annual interest is 11% of $83,000, which is $9,130. The compensating balance is 10% of $83,000, which is $8,300. Therefore, the net amount available is $83,000 - $8,300 = $74,700. The effective interest rate is $9,130 / $74,700 = 0.1222 or 12.2%.

Heintz Corporation Wishes to Borrow $83,000 at 11% Interest from the Local