Effective interest rate: Sun Prairie Traders borrowed $63,000 at an APR of 10 per cent. The loan called for a compensating balance of 10 per cent. What is the effective interest rate on the loan?

Question

Quizplus · Accepted Answer

The effective interest rate accounts for the compensating balance requirement. The compensating balance is 10% of $63,000, which is $6,300. This means the usable funds are $63,000 - $6,300 = $56,700. The interest paid is 10% of $63,000, which is $6,300. The effective interest rate is $6,300 / $56,700 = 11.11%.

Effective Interest Rate: Sun Prairie Traders Borrowed $63,000 at an APR