Zerox Copying Company plans to borrow $248,000. New Jersey National Bank will le

Question

Zerox Copying Company plans to borrow $248,000. New Jersey National Bank will lend the money at one-half percentage point over the prime rate at the time of 11.50 percent (12 percent total) and requires a compensating balance of 30 percent. The principal in this case will be funds that the firm can effectively use in the business. This loan is for one year.

a. What is the effective rate of interest? (Input your answer as a percent rounded to 2 decimal places. Use a 360-day year.) Effective rate of interest %

b. What would the effective rate be if Zerox were required to make four quarterly payments to retire the loan? (Input your answer as a percent rounded to 2 decimal places.) Effective rate of interest %

Explanation / Answer

First determine interest 11.5% (prime rate) + 0.5% = 12%

12% * $248,000=$29,760

to determine rate = 29760/(248000-(compensating balance))

= 29760/(248000-74400) = 0.1714 or 17.14%

Effective rate of interest with compensating balance and 4 quarterly payments

=(29760/173600)*(8/5) = 0.2742 or 27.42%

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