Bank A offers loans with a 10 percent stated annual rate and a 10 percent compen

Question

Bank A offers loans with a 10 percent stated annual rate and a 10 percent compensating balance. You wish to obtain $250,000 in a six month loan.

a. How much must you borrow to obtain $250,000 in usable funds? Assume you currently do not have any funds on deposit at the bank. What is the effective annual rate on a six month loan?
b. How much must you borrow to obtain $250,000 in usable funds if you currently have $10,000 on deposit at the bank? What is the effective annual rate on a six-month loan?
c. How much you borrow to obtain $250,000 in usable funds if you currently have $30,000 on deposit at the bank?
d. What is the effective annual rate on a six-month loan?

Explanation / Answer

x-x*10% =$250,000- $10,000 x=($250,000- $10,000 )/.9 x=266666.67 You should borrow=$266,666.67 Interest rate for 6 months = 5%*$266,666.67/240000.00 =5.556% EAR =(1+5.556%)^2 =11.42%

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