Answer (D) is correct . To illustrate, assume a $1,000 loan; the interest at 7% for 1 year is $70. Hence, the proceeds of the loan are $930 ($1,000 – $70). Also, 20% of the note, or ? $200, cannot be used by the borrower because of the compensating balance requirement. Consequently, only $730 is available for use by the borrower. Paying $70 interest for the use of $730 gives an interest rate of $9.59% ($70 ÷ $730). The effective interest rate on a discounted loan with a compensating balance requirement can be calculated as follows: Effective rate = Stated rate ÷ (1.0 – Stated rate – Compensating balance %) = 7% ÷ (100% – 7% – 20%) = 7% ÷ 73% = 9.59%
Answer (A) is incorrect because This percentage equals $70 divided by $800.
Answer (B) is incorrect because This percentage equals $70 divided by $744.
Answer (C) is incorrect because This percentage equals $70 divided by $930.
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