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? Round your final percentage answer to two decimal places. Do not round your intermediate calculations.

Question

Quizplus · Accepted Answer

To find the stated APR, we need to first calculate the total amount borrowed. Since the loan requires a 10% compensating balance, only 90% of the borrowed amount is available to use. 
So, the total amount borrowed = $225,000 / 0.90 = $250,000.

Next, we can use the effective interest rate formula:
Effective interest rate = (1 + (stated APR/n))^n - 1

Assuming monthly compounding (n=12), we can plug in the values and solve for the stated APR:

8.25% = (1 + (APR/12))^12 - 1
1.00825 = (1 + (APR/12))^12
ln(1.00825) = 12ln(1 + (APR/12))
APR = 12((e^(ln(1.00825))-1))= 0.0743 or 7.43%

Therefore, the stated APR on this loan is 7.43%, and the answer is C.

Good Homes Furnishings Is Borrowing $225,000