7.)Bank A offers loans with a 10 percent stated annual rate and a 10 percent com

Question

7.)Bank A offers loans with a 10 percent stated annual rate and a 10 percent compensating balance. You wish to obtain $250,000in 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 FINDS 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 MUST 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% c) Amount to be borrowed = $250,000 - $30,000 = $220,000 d) EAR = (1 + 10%/2)2 – 1 = 1.1025 – 1 = 0.1025 or 10.25%

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