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Tangshan Mining borrowed $100,000 for one year under a line of credit with a stated interest rate of 7.5 percent and a 15 percent compensating balance. Normally, the firm keeps almost no money in its checking account. Based on this information, the effective annual interest rate on the loan is ________.

Respuesta :

Answer:

Effective annual interest rate = 8.8% (Approx)

Explanation:

Given:

Nominal interest rate = 7.5% = 7.5 / 100 = 0.075

Compensating balance rate = 15% = 15 / 100 = 0.15

Effective annual interest rate = ?

Computation of effective annual interest rate:

Effective annual interest rate = [Nominal interest rate / (1 - Compensating balance rate)] x 100

Effective annual interest rate = [0.075 / (1 - 0.15)] x 100

Effective annual interest rate = [0.075 / (0.85)] x 100

Effective annual interest rate = [0.0882352941] x 100

Effective annual interest rate = 8.82352941

Effective annual interest rate = 8.8% (Approx)

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