This is the stated interest rate on the loan. In a loan with a compensating balance the borrower does not actually receive all of the monies that are loaned because they must keep on deposit with the bank some of the money as the compensating balance. However, they must pay interest on the full amount of the loan. Because of this the effective interest rate on the loan is higher than the stated (or nominal) rate of the loan. The interest payable divided by the usable funds equals the effective annual rate.
This answer results from increasing the amount of interest due for one year by 20% and dividing the result by $100,000. This is not the way a compensating balance requirement works. In a loan with a compensating balance requirement, the borrower does not actually receive all of the monies that are loaned because they must keep on deposit with the bank some of the money as the compensating balance. However, they must pay interest on the full amount of the loan. The interest payable divided by the usable funds equals the effective annual rate.
In a loan with a compensating balance the borrower does not actually receive all of the monies that are loaned because they must keep on deposit with the bank some of the money as the compensating balance. However, they must pay interest on the full amount of the loan. Therefore, Hagar will pay $7,000 in interest (7% of $100,000) but will have use of only $80,000. The interest payable divided by the usable funds equals the effective annual rate. The effective interest rate is 8.75% ($7,000 ÷ $80,000).
This is the interest on $100,000 at 7% divided by the amount of the loan plus the compensating balance. In a loan with a compensating balance the borrower does not actually receive all of the monies that are loaned because they must keep on deposit with the bank some of the money as the compensating balance. However, they must pay interest on the full amount of the loan. Because of this the effective interest rate on the loan is higher than the stated (or nominal) rate of the loan. The interest payable divided by the usable funds equals the effective annual rate.
|
