If Analog computers can borrow at 9.5% for 3 years, what is the annual rate of interest on a $800,000 loan where a 15% compensating balance is required?
A) 11.18%
B) 17.27%
C) 9.50%
D) none of the other answers are correct

Question

Quizplus · Accepted Answer

The effective interest rate is higher than the nominal rate due to the compensating balance requirement. The actual loan amount available is $800,000 - 15% of $800,000 = $680,000. The interest paid is 9.5% of $800,000, which is $76,000 annually. The effective interest rate is $76,000 / $680,000 = 11.18%.

If Analog Computers Can Borrow at 9