What is the effective interest rate on a 12% loan that requires a 10 percent minimum compensating balance?
A)13.33 percent
B)14.44 percent
C)15.50 percent
D)16.00 percent

Question

Quizplus · Accepted Answer

The effective interest rate is calculated by dividing the interest by the net amount available after maintaining the compensating balance. Here, for a 12% loan with a 10% compensating balance, the effective amount available is 90% of the loan. Thus, the effective interest rate is 12% / 0.9 = 13.33%.

What Is the Effective Interest Rate on a 12% Loan