Haverly, Inc. has borrowed $100,000. The loan is subject to a 10% compensating balance and has an effective interest rate of 13.33%. Calculate the quoted interest rate on the loan. (Round to nearest whole percent)
A)10%
B)11%
C)12%
D)13%

Question

Quizplus · Accepted Answer

To calculate the quoted interest rate on the loan, we first need to calculate the amount of money required for the compensating balance.

Compensating balance = $100,000 x 10% = $10,000

Total amount borrowed = $100,000 + $10,000 = $110,000

Effective interest rate = 13.33%

Quoted interest rate = (effective interest rate / (1 - compensating balance rate))

Quoted interest rate = (0.1333 / 0.9)

Quoted interest rate = 0.1481 or 14.81%

Rounded to the nearest whole percent, the quoted interest rate is 12%.