Good Homes Furnishings is borrowing $225,000. The loan requires a 10 percent compensating balance, and the effective interest rate on loan is 8.25 percent. What is the stated APR on this loan? Do not round your intermediate calculations, and round your final percentage answer to two decimal places.

Question

Quizplus · Accepted Answer

To find the stated APR, we need to calculate the total amount borrowed, including the compensating balance. Let's call the actual amount borrowed X:
X + 0.10X = $225,000
1.10X = $225,000
X = $204,545.45
Now we can use the formula for effective interest rate:
Effective interest rate = (interest paid / amount borrowed) x 100%
We know that the effective interest rate is 8.25%, and we can calculate the interest paid:
Interest paid = X x 8.25% = $16,875
Now we can solve for the stated APR:
Stated APR = (interest paid / actual amount borrowed) x 100%
Stated APR = ($16,875 / $204,545.45) x 100% = 8.25%
Therefore, the stated APR is 8.25%, which is the same as the effective interest rate. None of the options provided are correct.

Good Homes Furnishings Is Borrowing $225,000