Fourth Bank offers Auto Corner a $150,000 line of credit at an annual rate of interest of 12.3 percent.The loan agreement also requires a 10 percent compensating balance on any funds used.What is the effective annual interest rate if the firm needs $120,000 for one year?

Question

Quizplus · Accepted Answer

Amount borrowed = $120,000/(1 - .1)= $133,333.33Annual interest = .123 × $133,333.33 = $16,400Effective interest rate = $16,400/$120,000 = .1367,or 13.67 percent

Fourth Bank Offers Auto Corner a $150,000 Line of Credit