Question

Faircross farms harvests its crops four times annually and receives payment for its crop 90 days after it is picked and shipped. however, planting, irrigating, and harvesting must be done on a nearly continual schedule. the firm uses 90-day bank notes to finance its operations. the firm arranges an 11 percent discount interest loan with a 20 percent compensating balance four times annually. what is the effective annual interest rate of these discount loans?

Answer 1

Assume firm needs $10,000. Face amount of loan = $10,000/(1 â’ 0.11 â’ 0.20) = $14,492.75. Discount interest = 0.11($14,492.75) =$1,594.20. Compensating balance = 0.20($14,492.75) = $2,898.55. With a financial calculator, enter N = 1, PV = 10,000, PMT= 0, FV = â’11,594.20, and solve for I/YR = 15.94%.