Question

Juno Industrial Supply has a line of credit of $200,000 with an interest rate of 7.1 percent. The loan agreement requires a compensating balance of 3.3 percent of the total amount borrowed, which will be held in an interest-free account. What is the effective interest rate if the company requires $132,000 for operations for one year?

Answer 1

Answer:

Effective rate of interest will be 7.34 %

Explanation:

We have given company requires $132000 for operations for one year

It is given that 3.3 % of the total amount is interest free

So effective amount borrowed $=132000-132000\times 0.033= 127644$

Interest rate is given 7.1 %

So interest amount $=132000\times 0.071= 9372$

So effective interest rate $=\frac{9372}{127644}\times 100=7.34$ %