Question

Digital Access Inc. needs $400,000 in funds for a project. (Assume the loan term is one year.)

  

a.	With a compensating balance requirement of 20 percent, how much will the firm need to borrow?

  

Amount to be borrowed

$

  

b.	Given your answer to part a and a stated interest rate of 9 percent on the total amount borrowed, what is the effective rate on the $400,000 actually being used? (Input your answer as a percent rounded to 2 decimal places.)

  

Effective rate of interest

%

Answer 1

Solution.

Amount need in fund = 400,000

compensating balance requirement of 20 percent,

Amount to be borrow= $400,000 / .80 = $500,000

B.

Interest rate = 9%

Interest = $500,000 x 9% = $45,000

Effective rate = $45,000 / $400,000 = 11.25%