The Nichols Company borrowed $12,000 from the bank and agreed to keep $3,000 on deposit at all times.The stated rate of interest on the loan is 10%.What is the real rate of interest?
A)10%
B)12%
C)13.3%
D)14%

Question

Quizplus · Accepted Answer

The real rate of interest is the effective interest rate that the borrower pays after accounting for any fees or requirements, such as the deposit requirement in this case.

We can start by calculating the interest paid on the $12,000 loan at the stated rate of 10%:

$12,000 x 0.10 = $1,200

However, the borrower must keep $3,000 on deposit at all times, which reduces the amount available to use from the loan. Therefore, the effective loan amount is only $9,000:

$12,000 - $3,000 = $9,000

Now, we can calculate the real rate of interest by dividing the interest paid by the effective loan amount:

$1,200 ÷ $9,000 = 0.1333 or 13.33%

Therefore, the best choice is C, 13.3%.

The Nichols Company Borrowed $12,000 from the Bank and Agreed