Answer (D) is correct . The $100,000 compensating balance requirement is partially satisfied by the company’s practice of maintaining a $50,000 balance for transaction purposes. Thus, only $50,000 of the loan will not be available for current use, leaving $450,000 of the loan usable. At 8% interest, the $500,000 loan would require an interest payment of $40,000 per year. This is partially offset by the 3% interest earned on the $50,000 incremental balance, or $1,500. Subtracting the $1,500 interest earned from the $40,000 of expense results in net interest expense of $38,500 for the use of $450,000 in funds. Dividing $38,500 by $450,000 produces an effective interest rate of 8.56%.
Answer (A) is incorrect because The effective interest rate must exceed the 8% contract rate because not all of the borrowed funds are available for the debtor’s use.
Answer (B) is incorrect because This percentage assumes incremental earnings on the checking account of $3,000.
Answer (C) is incorrect because This percentage is based on the assumption that the company ordinarily maintains a zero balance.
|
