Sun Prairie Traders borrowed $63,000 at an APR of 10 percent. The loan called for a compensating balance of 10 percent. What is the effective interest rate on the loan? Round your final percentage answer to two decimal places.

Question

Quizplus · Accepted Answer

The effective interest rate can be calculated by dividing the interest amount by the actual loan amount available after setting aside the compensating balance. Here, a 10% compensating balance on a $63,000 loan is $6,300, leaving $56,700 available to the borrower. The interest for the year at 10% APR is $6,300. Therefore, the effective interest rate is $6,300 / $56,700 = 0.1111 or 11.11%.

Sun Prairie Traders Borrowed $63,000 at an APR of 10