Answer (B) is correct . At 10%, the interest on a $500,000 loan is $50,000 per year. However, the $500,000 loan is effectively reduced to $450,000 of usable funds by the compensating balance requirement. Thus, the borrower pays $50,000 of interest for a $450,000 loan, an effective rate of 11.1% ($50,000 ¡Â $450,000).Answer (A) is incorrect because This percentage is the nominal rate.
Answer (C) is incorrect because This percentage equals $50,000 divided by $550,000.
Answer (D) is incorrect because This percentage equals $55,000 divided by $450,000.
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