The effective annual interest rate on a loan with a compensating balance when no interest is received on the compensating balance is the annual interest due divided by the net funds the borrower will have available to use. If the compensating balance on a $100,000,000 loan were $10,250,000, the net funds available to the borrower would be $100,000,000 ? $10,250,000, which is $89,750,000. At a stated interest rate of 10%, as in Option #2, the annual interest due on the loan would be $10,000,000. The effective annual interest rate would be $10,000,000 ÷ $89,750,000, which is 11.142% or rounded, 11.14%. The requirement is that the effective annual interest rate be 10.25%. This answer choice does not fulfill the requirement.
The effective annual interest rate on a loan with a compensating balance when no interest is received on the compensating balance is the annual interest due divided by the net funds the borrower will have available to use. If the compensating balance on a $100,000,000 loan were $2,500,000, the net funds available to the borrower would be $100,000,000& ? $2,500,000, which is $97,500,000. At a stated interest rate of 10%, as in Option #2, the annual interest due on the loan would be $10,000,000. The effective annual interest rate would be $10,000,000 ÷ $97,500,000, which is 10.256% or rounded, 10.26%. The requirement is that the effective annual interest rate be 10.25%. Although it is close, this answer choice does not fulfill the requirement.
The effective annual interest rate on a loan with a compensating balance when no interest is received on the compensating balance is the annual interest due divided by the net funds the borrower will have available to use. Option #2 is a $100,000,000 loan with a stated interest rate of 10%. On a $100,000,000 loan at 10%, the interest due for one year would be $10,000,000. We next need to find the net funds available to the borrower that would cause the effective annual interest rate to be 10.25% when the interest due for one year is $10,000,000. Once we have that, we can calculate what the compensating balance requirement is. Let X = the net funds available to the borrower. $10,000,000 ÷ X = .1025 X = $97,560,976 Therefore, the compensating balance required is $100,000,000 ? $97,560,976, which equals $2,439,024. $2,439,024.39 is not one of the answer choices given. The closest answer choice among those given is $2,440,000, and the difference is simply a rounding difference. We can confirm that and that this is the correct answer, as follows: $100,000,000 ? $2,440,000 = $97,560,000. Net available principal of $97,560,000 results in an effective annual interest rate of 10.25% when rounded, as follows: $10,000,000 ÷ $97,560,000 = .102501025 or 10.25%, rounded.
The effective annual interest rate on a loan with a compensating balance when no interest is received on the compensating balance is the annual interest due divided by the net funds the borrower will have available to use. If the compensating balance on a $100,000,000 loan were $250,000, the net funds available to the borrower would be $100,000,000 ? $250,000, which is $99,750,000. At a stated interest rate of 10%, as in Option #2, the annual interest due on the loan would be $10,000,000. The effective annual interest rate would be $10,000,000 ÷ $99,750,000, which is 10.025% or rounded, 10.03%. The requirement is that the effective annual interest rate be 10.25%. This answer choice does not fulfill the requirement.
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