Question

If Analog Computers can borrow at 8% annually for three years, what is the effective rate of interest on a $1,000,000 loan where a 15% compensating balance is required?

Answer 1

Answer:

effective interest rat = 0.094 or 9.41%

Explanation:

effective rate of interest is given as$effective\ interest\ rate = \frac{borrowing\ interest \ rate}{1 -compensating\ balancing \requirement \rate}$

borrow interest rate = 8%

compensating rate  =15%

effective interest rate = \frac{8%}{1 -15%}

                                    $= \frac{0.08}{1-0.15}$

         effective interest rat = 0.094 or 9.41%