Come and Go Bank offers your firm a discount interest loan with an interest rate
ID: 2646505 • Letter: C
Question
Come and Go Bank offers your firm a discount interest loan with an interest rate of 8 percent for up to $24 million, and in addition requires you to maintain a 1 percent compensating balance against the face amount borrowed.
What is the effective annual interest rate on this lending arrangement? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Required:What is the effective annual interest rate on this lending arrangement? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Explanation / Answer
Nominal interest on the loan = $24 million * 8% = $1.92 million
Adjusting the principal for compensatory balance to be maintained i.e. loan post the compensatory balance = $24 million - $1 million = $23million
Effective Rate of Interest = Interest