Question

The treasurer of Aspire to Inspire Incorporated is seeking a $30,000 loan for 180 days from Wrigley Bank and Trust. The stated interest rate is 10 percent and there is a 15 percent compensating balance requirement. The treasurer always keeps a minimum of $2,500 in the firm's checking account. These funds could count toward meeting any compensating Balance requirement. What is the effective rate of interest on this loan?

Answer 1

Effective interest rate on the loan is 11.76%

Explanation:

Here we have loan amount, Principal = $30,000

Duration of loan = 180 days

Interest on loan = 10% = 10% of $30,000 = $3000

Compensating balance = 15% of $30000 = $4,500

Available balance = $30,000 - $4,500 = $25,500

Therefore, the effective interest rate is given by

`Effective \, \, interest \, \, rate =(Interest \, Amount )/((Principal) - (Compensating \, Balance))= (\$3,000 )/(\$30,000 - \$4,500)`

Effective interest rate on the loan = 0.1176 or 11.76 %.