Serengeti Travels has borrowed $50,000 at a stated APR of 8.5 percent. The loan calls for a compensating balance of 8 percent. What is the effective interest rate for this company? Round your final percentage answer to two decimal places.

Question

Quizplus · Accepted Answer

To find the effective interest rate, we need to first calculate the amount of money Serengeti Travels needs to keep on deposit as a compensating balance. This is 8 percent of the loan amount, which is $50,000 x 0.08 = $4,000.
Then, we need to calculate the interest paid on the loan for one year, which is $50,000 x 0.085 = $4,250.
Next, we divide the interest paid by the amount of money Serengeti Travels actually receives ($50,000 - $4,000 = $46,000) to get the true interest rate: $4,250 / $46,000 = 0.0924, or 9.24%. Therefore, the effective interest rate is 9.24%, which is represented by choice A.

Serengeti Travels Has Borrowed $50,000 at a Stated APR of 8.5