B) if the firm normally maintains $110, 000 in deposit balances at the bank, the
ID: 2745244 • Letter: B
Question
B) if the firm normally maintains $110, 000 in deposit balances at the bank, the effective annual rate of interest is _____ % (round to 2 decimal places)
C)If the firm normally maintains $200,000 in deposit balances at bank, the effective annual rate of interest Is _____% (round to 2 decimal places) P16-12 (similar to) Question Help * Compensating balances and effective annual rates Lincoln Industries has a line of credit at Bank Two that requires it to pay 8% interest on its borrowing and to maintain a compensating balance equal to 15% of the amount borrowed. The firm has borrowed S800.000 during the year under the agreement. Calculate he effective annual rate on the firm's borrowing in each of the following circumstances: a. The firm normally maintains no deposit balance at Bank Two. b. The firm normally maintains $110,000 in deposit balance at Bank Two c.The firm normally maintains $200,000 deposit balance at Bank Two. d. Compare, contrast, and discuss your findings in parts a, b, and c. a. If the firm normally maintains no deposit balance at the bank, the effective annual rate of interest is [ %. (Round to two decimal places.)
Explanation / Answer
a) Effective Interest Rate (EIR) = 8%*800000/800000 = 8%
b) Effective Interest Rate (EIR) = 8%*800000/(800000-110000) = 9.28 %
c) Effective Interest Rate (EIR) = 8%*800000/(800000-200000) = 10.67 %
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