When there is a compensating balance and no interest is earned on the compensating balance, the effective interest rate is calculated as follows: the interest charge on the entire amount of the loan divided by the new funds received after subtracting the compensating balance. In this case, this is [($500,000 × .095) ÷ ($500,000 × .84)], or $47,500 ÷ $420,000. This is equal to 11.31%. If the company needs a net amount of $500,000 for its working capital, it will actually need to borrow more than $500,000, since the full amount of the loan will not be available to use. The amount borrowed will need to be $500,000 ÷ (1 ? .16), or $595,238. Interest on $595,238 at 9.5% for one year will be $56,548. $56,548 ÷ $500,000 is also equal to 11.31%. So either calculation will result in the correct answer.
This is the average of the 9.5% simple interest and the 16% compensating balance requirement. When there is a compensating balance and no interest is earned on the compensating balance, the effective interest rate is calculated as follows: the interest charge on the entire amount of the loan divided by the new funds received after taking out the compensating balance.
When there is a compensating balance and no interest is earned on the compensating balance, the effective interest rate is calculated as follows: the interest charge on the entire amount of the loan divided by the new funds received after taking out the compensating balance. This answer does not follow this calculation. We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice -- not its letter, because that can change with every study session created. The Question ID number appears in the upper right corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study materials better.
When there is a compensating balance and no interest is earned on the compensating balance, the effective interest rate is calculated as follows: the interest charge on the entire amount of the loan divided by the new funds received after taking out the compensating balance. This answer does not follow this calculation. We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice -- not its letter, because that can change with every study session created. The Question ID number appears in the upper right corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study materials better.
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