Tangshan Mining borrowed $10,000 for one year under a line of credit with a stated interest rate of 8 percent and a 10 percent compensating balance. Thus, the firm keeps a balance of about $800 in its checking account.

Question

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The information given states that Tangshan Mining keeps a balance of about $800 in its checking account, which is not enough to meet the 10 percent compensating balance requirement for the $10,000 line of credit. Therefore, it is not possible for Tangshan Mining to have obtained the line of credit under the terms described.

Tangshan Mining Borrowed $10,000 for One Year Under a Line