Come and Go Bank offers your firm a discount interest loan with an interest rate
ID: 2643620 • Letter: C
Question
Come and Go Bank offers your firm a discount interest loan with an interest rate of 8 percent for up to $28 million, and in addition requires you to maintain a 5 percent compensating balance against the face amount borrowed.
What is the effective annual interest rate on this lending arrangement?
Come and Go Bank offers your firm a discount interest loan with an interest rate of 8 percent for up to $28 million, and in addition requires you to maintain a 5 percent compensating balance against the face amount borrowed.
Explanation / Answer
EAR equals
Principal x Interest Rate/principal-compensating balance
28000000x.08/28000000-1400000
2240000/26600000=.084
ans=8.4%
EAR equals
Principal x Interest Rate/principal-compensating balance
28000000x.08/28000000-1400000
2240000/26600000=.084
ans=8.4%