What interest rate would make it worthwhile to incur a compensating balance of $

Question

What interest rate would make it worthwhile to incur a compensating balance of $20,000 in order to get a 1 percent lower interest rate on a 1 year, pure discount loan of $275,000? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

What interest rate would make it worthwhile to incur a compensating balance of $20,000 in order to get a 1 percent lower interest rate on a 1 year, pure discount loan of $275,000? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

Explanation / Answer

1% interest rate on 275,000 = 1/100*275,000 = $2,750

Let the interest rate be "x"

so, interest rate*compensating balance must give atleast 2,750

so, x * 20,000 = 2,750

x = 2,750/20,000

or x = 13.75%. So interest rate must be at least 13.75%

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