Carey Company is borrowing $275,000 for one year at 14.0 percent from Second Int
ID: 2654040 • Letter: C
Question
Carey Company is borrowing $275,000 for one year at 14.0 percent from Second Intrastate Bank. The bank requires a 15 percent compensating balance. The principal refers to funds the firm can effectively utilize (Amount borrowed Compensating balance).
What is the effective rate of interest? (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)
What would the effective rate be if Carey were required to make 12 equal monthly payments to retire the loan? (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)
Carey Company is borrowing $275,000 for one year at 14.0 percent from Second Intrastate Bank. The bank requires a 15 percent compensating balance. The principal refers to funds the firm can effectively utilize (Amount borrowed Compensating balance).
Explanation / Answer
a.What is the effective rate of interest? (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)
Effective rate of interest = (14/(100-15))
Effective rate of interest = 16.47%
Effective rate of interest 16.47 %
b.
What would the effective rate be if Carey were required to make 12 equal monthly payments to retire the loan? (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)
Effective rate of interest = 2*Annual no of payment*Interest payment/((Total no of payment +1)*Principal
Effective rate of interest = 2*12*14%*275000/(13*275000)
Effective rate of interest = 25.85%
Effective rate of interest 25.85%