Grand Hotel Company is required to maintain a $50,000 compensating balance with the First National Bank...
Grand Hotel Company is required to maintain a $50,000 compensating balance with the First National Bank in order to receive a $600,000 loan. The stated rate on this loan is 10%. What is the effective rate?
a) 8.3%
b) 10.9%
c) 9.2%
d) 10%
Homework Answers
Loan amount = $600,000
Compensating balance = $50,000
Cash received from loan = Loan amount - Compensating balance
= 600,000 - 50,000
= $550,000
Stated rate of interest = 10%
Annual interest payable = Loan amount x Stated rate of interest
= 600,000 x 10%
= $60,000
Effective rate = Annual interest payable/Cash received from loan
= 60,000/550,000
= 10.9%
Correct option is (b)
Please ask if you have any query related to the question. Thank you
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