Your company plans to borrow $13 million for 12 months, and your banker gives yo

Question

Your company plans to borrow $13 million for 12 months, and your banker gives you a stated rate of 24 percent interest.

Calculate the effective rate of interest for the following types of loans.

Simple 24 percent interest with a compensating balance of 10 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)

Discounted interest (with no compensating balance). (Input your answer as a percent rounded to 2 decimal places.)

An installment loan (12 payments). (Input your answer as a percent rounded to 2 decimal places.)

Discounted interest with a compensating balance of 5 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)

Your company plans to borrow $13 million for 12 months, and your banker gives you a stated rate of 24 percent interest.

Explanation / Answer

Part A)

The effective rate of interest can be calculated with the use of following formula:

Effective Rate of Interest = Interest/(Amount Borrowed - Compensating Balance)

________

Here, Interest = 13,000,000*24% = $3,120,000 and Compensating Balance = 13,000,000*10% = $1,300,000

Using these values provided in the above formula, we get,

Effective Rate of Interest = 3,120,000/(13,000,000 - 1,300,000) = 26.67%

________

Part B)

The effective rate of interest can be calculated with the use of following formula:

Effective Rate of Interest = Interest/(Amount Borrowed - Interest)

________

Here, Interest = 13,000,000*24% = $3,120,000

Effective Rate of Interest = 3,120,000/(13,000,000 - 3,120,000) = 31.58%

________

Part C)

The effective rate of interest can be calculated with the use of following formula:

Effective Rate of Interest = (2*12*Interest)/(13*Amount Borrowed)

________

Here, Interest = 13,000,000*24% = $3,120,000

Effective Rate of Interest = (2*12*3,120,000)/(13*13,000,000) = 44.31%

________

Part D)

The effective rate of interest can be calculated with the use of following formula:

Effective Rate of Interest = Interest/(Amount Borrowed - Compensating Balance - Interest)

________

Here, Interest = 13,000,000*24% = $3,120,000 and Compensating Balance = 13,000,000*5% = $650,000

Using these values provided in the above formula, we get,

Effective Rate of Interest = 3,120,000/(13,000,000 - 650,000 - 3,120,000) = 33.80%

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