Homework Answers
Amount of compensating balance to be maintained is 15% of outstanding loan amount of $475,000
Compensation balance = 15% of $475,000 = $71,250
Net Principal = Loan balance - compensating balance
=$475,000 - $71,250
=$403,750
Amount available to Bob is only $403,750 but interest will be payable on the outstanding amount:
Interest = $475,000 * 7.5% = $35,625
But, effective interest will be on the net principal availbe to Bob:
Effective interest rate = Interest/Net principal
=$35,625/$403,750
=8.8%
the answer is D.
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