Would it be worth it to incur a compensating balance of $4,000 in order to get a 1.5-percent-lower interest rate on a 1-year, pure discount loan of $300,000?
A) yes if the interest rate is less than 13.64%
B) no if the interest rate is less than 13.64%
C) yes if the interest rate is more than 1.5%
D) not enough information is given to determine

Question

Quizplus · Accepted Answer

First, calculate the cost of the compensating balance:
$4,000/($300,000 + $4,000) = 1.32%
Next, calculate the interest rate savings:
1.5% - 1.32% = 0.18%
Therefore, the interest rate would need to be at least 13.64% (1.32% + 0.18%) in order for it to be worth incurring the compensating balance.

Would It Be Worth It to Incur a Compensating Balance