The Brooks Company paid total interest of $3,000 on its line of credit borrowings for the year.Also,Brooks paid a $50 commitment fee and borrowed on average $30,000 for the year.Of the $30,000 average borrowings,$6,000 remained in the bank as a compensating balance.What is the Brook's annual effective rate of interest?

Question

Quizplus · Accepted Answer

To calculate the annual effective rate of interest, we need to use the following formula:

Annual Effective Rate of Interest = (Total Interest Paid + Fees) / Average Borrowings * (1 - Compensating Balance Percentage)

In this case:

Total Interest Paid = $3,000
Fees = $50
Average Borrowings = $30,000
Compensating Balance = $6,000
Compensating Balance Percentage = Compensating Balance / Average Borrowings = 6,000 / 30,000 = 0.20

Therefore:

Annual Effective Rate of Interest = ($3,000 + $50) / $30,000 * (1 - 0.20) = 0.1071 or 10.71%

The closest answer choice is D) 12.71%, so that is the correct answer.

The Brooks Company Paid Total Interest of $3,000 on Its