Bestor Bookkeeping has a $150,000 compensating balance loan with its bank.The terms of the loan call for Bestor to keep 8% of the loan as a compensating balance and pay interest at an annual rate of 7.50% 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 maximum amount Bestor can borrow is $150,000 / (1 - 0.08) = $163,043.48. 
The interest due at the end of the year is $163,043.48 x 0.075 = $12,227.61. 
However, since Bestor has to maintain a compensating balance of 8%, the actual amount of loan received is $150,000, and the interest due is $150,000 x 0.075 = $11,250. Thus, the correct answer is (B).

Bestor Bookkeeping Has a $150,000 Compensating Balance Loan with Its