Answer:
The effective interest that Lynn pays on its $3,000,000 loan is 11.67%
Explanation:
For computing the interest rate, first, we have to find out the effective interest which is shown below:
= Interest on borrowings - interest on the compensatory balance
where,
Interest on borrowings = Borrowings × interest rate
= $3,000,000 × 11%
= $330,000
Interest on compensatory balance = Compensatory balance × interest rate
= $300,000 × 5%
= $15,000
Now put these values to the above formula
So, the value would equal to
= $330,000 - $15,000
= $315,000
The formula to compute effective rate is shown below:
= Effective interest ÷ Total funds available
Where,
Total fund available = Borrowed amount - compensatory balance
= $3,000,000 - $300,000
= $2,700,000
And, the effective interest is $315,000
Now put these values to the above formula
So, the rate would equal to
= $315,000 ÷ $2,700,000
= 11.67%
