Your company plans to borrow S5 million for 12 months, and your banker gives you

Question

Your company plans to borrow S5 million for 12 months, and your banker gives you a stated rate of 17 percent interest. Calculate the effective rate of interest for the following types of loans. Simple 17 percent interest with a compensating balance of 8 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.) Effective rate of interest % discounted interest (with no compensating balance). (Input your answer as percent rounded lo 2 decimal places.) Effective rate of interest % c. An installment loan (12 payments). (Input your answer as a percent rounded to 2 decimal places.) d. Discounted interest with a compensating balance of 4 percent. (Use a 360-dav year. Input your answer as a percent rounded to 2 decimal places.)

Explanation / Answer

Q.1) a) Effective rate of interest when simple rate of interst 17% per annum and compensating rate is 8%

=(5*17%)/(5-5*8%)=18.48%

b) Discounted interest is 17% then effective rate is

=(5*17%)/(5-5*17%)=20.48

c) Effective rate of interest for instalment loan is 17%

d)Effective Rate=(5*17%)/(5-5*17%-5*4%) = 21.52

2)a)Effective rate=(275000*14%)/(275000-275000*15%)=16.47%

b)Effective interest rate is 14%

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