Carey Company is borrowing $275,000 for one year at 10.5 percent from Second Int
ID: 2731826 • Letter: C
Question
Carey Company is borrowing $275,000 for one year at 10.5 percent from Second Intrastate Bank. The bank requires a 20 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 10.5 percent from Second Intrastate Bank. The bank requires a 20 percent compensating balance. The principal refers to funds the firm can effectively utilize (Amount borrowed Compensating balance).
Explanation / Answer
Answer:a Effective rate of interest with 20% compensating balance =[Interest/(Principal -Compensating balance)]*(Days in the year(360)/Days loan is outstanding)
=[28875/(275000-55000)]*(360/360)
=13.13%
Answer:b Installment loan with compensating balance
2 *Annual no. payments* Interest/(Total no. of payments+1)*Principal
=2*12*28875/(12+1)*(275000-55000)
=693000/2860000
=24.23%