Come and Go Bank offers your firm a discount interest loan at 7 percent for up t
ID: 2647316 • Letter: C
Question
Come and Go Bank offers your firm a discount interest loan at 7 percent for up to $32 million, and in addition requires you to maintain a 5 percent compensating balance against the amount borrowed.
What is the effective annual interest rate on this lending arrangement? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Come and Go Bank offers your firm a discount interest loan at 7 percent for up to $32 million, and in addition requires you to maintain a 5 percent compensating balance against the amount borrowed.
Explanation / Answer
Assuming the firm takes 32 million loan.
Compensating funds = 5% of 32 million = 1.6 million
Net useable funds = 30.4 million
Interest on loan = 7% of 32 million = 2.24 million
Effective interest rate = 2.24/30.4 = 7.37%