Question

Your company plans to borrow $12 million for 12 months, and your banker gives you a stated rate of 21 percent interest. Calculate the effective rate of interest for the following types of loans. a. Simple 21 percent interest with a compensating balance of 12 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)

Answer 1

The correct answer is 23.86%.

Step-by-step explanation:

According to the scenario, the given data are as follows:

Loan amount = $12,000,000

Time period = 12 months

Rate of interest = 21%

compensating balance = 12%

So we can calculate the effective rate of interest by using following method:

Effective rate of interest = (Loan amount × Interest Rate ) ÷ Loan amount × (1 – compensating balance )

By putting the value, we get:

= ( $12,000,000 × 0.21) ÷ ($12,000,000 × (1-0.12)

= 0.2386 or 23.86%