Zerox Copying Company plans to borrow $202,000. New Jersey National Bank will le
ID: 2719356 • Letter: Z
Question
Zerox Copying Company plans to borrow $202,000. New Jersey National Bank will lend the money at one-half percentage point over the prime rate at the time of 10.50 percent (11 percent total) and requires a compensating balance of 29 percent. The principal in this case will be funds that the firm can effectively use in the business. This loan is for one year.
What is the effective rate of interest?
What would the effective rate be if Zerox were required to make four quarterly payments to retire the loan?
a.What is the effective rate of interest?
b.What would the effective rate be if Zerox were required to make four quarterly payments to retire the loan?
Explanation / Answer
Compensatory Balance is a minimum credit balance that a bank may require a borrower to keep on deposit as a condition for granting a loan; a common requirement for establishing a line of credit at a bank loan amount 202000 Interst @ 11 % 22220 Compensating balance = 202000*29% 58580 a. effective interst rate = Interst/(loan-compensatory balance)*100 15.49296
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