Come and Go Bank offers your firm a discount interest loan at 7 percent for up t
ID: 2647479 • 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
SOLUTION:
Calculation of Effective annual interest rate.
= $32,000,000 * 7% = $2,240,000
= $32,000,000 * 5% = $1,600,000
= $32,000,000 - $2,240,000 - $1,600,000 = $28,160,000
= $2,240,000 / $28,160,000 = 7.95%
Effective annual interest rate = 7.95%