Answer (C) is correct . The bank requires a compensating balance of 5% ($5 million ÷ $100 million). The firm’s effective rate on this loan can be calculated as follows: Effective rate?= Stated rate ÷ (1.0 – compensating balance %) ?= 8% ÷ (100% – 5%) ?= 8% ÷ 95% ?= 8.42% The amount of the loan is not needed to calculate the effective rate.
Answer (A) is incorrect because The effective rate exceeds the stated rate when a compensating balance is required.
Answer (B) is incorrect because The rate of 8.00% is the stated rate.
Answer (D) is incorrect because The rate of 13.00% is the sum of the stated rate and the compensating balance percentage.
| 
