First Bank offers KNJ Co.a $100,000 line of credit at an annual rate of interest of 9.5 percent.The loan agreement also requires a 4 percent compensating balance on any funds used.What is the effective annual interest rate if the firm needs $60,000 for the entire year to fund its operations?

Question

Quizplus · Accepted Answer

Amount borrowed = $60,000/(1 - .04)= $62,500Annual interest = .095 × $62,500 = $5,937.50Effective interest rate = $5,937.50/$60,000 = .0990,or 9.90 percent

First Bank Offers KNJ Co