Effective interest rate: Maggie's Bistro is borrowing $375,000. The loan requires an 8 per cent compensating balance, and the effective interest rate on the loan is 10.326 per cent. What is the stated APR on this loan? Round to one decimal place.

Question

Quizplus · Accepted Answer

To find the stated APR, we need to first calculate the loan amount with the compensating balance.

Compensating balance = 8% of loan = 0.08 * $375,000 = $30,000

Effective loan amount = $375,000 - $30,000 = $345,000

Now, we can use the formula for effective interest rate to solve for the stated APR:

Effective interest rate = (1 + i/n)^(n) - 1

where i is the stated APR, and n is the number of compounding periods.

Using a financial calculator or spreadsheet, we can plug in the given values to solve for i:

10.326% = (1 + i/1)^1 - 1

Solving for i, we get:

i = 9.5%

Therefore, the stated APR on the loan is 9.5%.

The correct answer is B.

Effective Interest Rate: Maggie's Bistro Is Borrowing $375,000