Come and Go Bank offers your firm a 8 percent discount interest loan for up to $

Question

Come and Go Bank offers your firm a 8 percent discount interest loan 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? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)

Come and Go Bank offers your firm a 8 percent discount interest loan for up to $28 million, and in addition requires you to maintain a 5 percent compensating balance against the face amount borrowed.

Explanation / Answer

5% of 28M = 1.4M

So Net amount borrowed = 28-1.4 = 26.6M

Int Paid = 8%*28M = 2.24M

So we actually paid 2.24M int on 26.6M

SO effective Int rate = 2.24/26.6 =8.42%

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