This is the stated interest rate plus the percentage of the total loan amount required to be maintained as a compensating balance. This is not the correct way to calculate the effective annual interest rate on a loan with a compensating balance 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.
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. The annual interest due on a $100,000,000 loan with a stated interest rate of 8.00% is $8,000,000. If the compensating balance requirement is $5,000,000, the net funds available to the borrower to use will be $95,000,000. Thus, the effective annual interest rate will be $8,000,000 ÷ $95,000,000, which is .0842 or 8.42%.
This is $8,000,000 divided by $105,000,000. 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. With a $5,000,000 compensating balance requirement on a $100,000,000 loan, the borrower will have only $95,000,000 available to use.
8% is the stated rate of interest. 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. That will be a different rate from the stated interest rate.
|
