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Chapter 3: 17BP_a (page 251)

Your company plans to borrow $13 million for 12 months, and your banker gives you a stated rate of 24 per cent interest. You would like to know the effective rate of interest for the following types of loans. (Each of the following parts stands alone.)

a. Simple 24 per cent interest with a 10 percent compensating balance.

Short Answer

Expert verified

The effective interest rate is 26.67%.

Step by step solution

01

Information provided in the question

Loan amount = $13,000,000

Loan term = 1 year

Interest rate = 24%

Compensating balance = 10%

02

Calculation of interest payable

The interest payable is $3,120,000.

Interestpayable=Interest脳Principal=24%脳$13,000,000=$3,120,000

03

Calculation of compensating balance in monetary terms

The compensating balance is $1,300,000.

Compensatingbalance=Comepnsatingbalancerate脳Principal=10%脳$13,000,000=$1,300,000

04

Calculation of effective interest rate on loan

The effective interest rate with a 10% compensating rate is 26.67%.

Effectiverate=InterestPrincipal-Compensatingbalance脳DaysinyearDaysloanisoutstanding=$3,120,000$13,000,000-$1,300,000脳360360=26.67%

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Most popular questions from this chapter

Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 49,000 units per year, an ordering cost of \(8 per order, and carrying costs of \)1.60 per unit.

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Bombs Away Video Games Corporation has forecasted the following monthly sales:

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March

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April

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May

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August

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September

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November

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December

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