Question

1. Russell's of Townville needs to borrow $48,000 for one year. The bank requires a 10 percent compensating balance on any amount borrowed and an annual interest rate of 9 percent. What is the effective interest rate on this loan? A. 8.9% B. 8.6% C. 9.4% D. 10.0%

Answer 1

D. 10.0%

Step-by-step explanation:

As the bank reqiresd 10% compensating balance the actual amount unrestricted for the loan is 48,000 x (1 - 10%) = 43,200

and from this amount we have to solve for the effective rate:

principal x rate = interest

48,000 x 0.09 = 4,320

now we divide the interest over the actual principal to know the effective rate:

4,320 / 43,200 = 0.10 = 10%