BB Farms harvests its crops four times annually and receives payment for its cro

Question

BB Farms harvests its crops four times annually and receives payment for its crop 3 months after it is picked and shipped. However, planting, irrigating, and harvesting must be done on a nearly continual schedule. The firm uses 3-month bank notes to finance its operations. The firm arranges an 11 percent discount interest loan with a 20 percent compensating balance four times annually. What is the effective annual interest rate on the loan? Note that the 11 percent stated interest rate is per year.

a. 15.94%

b. 11.46%

c. 14.24%

d. 12.72%

e. 15.02%

Explanation / Answer

Quarterly interest rate = 11/4

= 2.75% per quarter

..

Effective Annual Interest rate = 1.0275^4 -1

= 11.46% .... Option-B is the correct answer

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