Pacific Automotive has a $250,000 compensating balance loan with its bank.The terms of the loan call for Pacific to keep 10% of the loan as a compensating balance and pay interest at an annual rate of 6.50% on the entire amount.If the firm borrows the maximum amount for one year,how much interest is due at the end of the year?

Question

Quizplus · Accepted Answer

The loan amount is $250,000, but 10% of it, which is $25,000, must be kept as a compensating balance. Therefore, Pacific Automotive can only use $225,000 of the loan amount. The interest due at the end of the year is calculated as follows:
$225,000 x 0.065 = $14,625
Therefore, the answer is B) $14,625.

Pacific Automotive Has a $250,000 Compensating Balance Loan with Its