Faircross Farms harvests its crops four times annually and receives payment for
ID: 2798346 • Letter: F
Question
Faircross 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. 11.46% b. 12.72% c. 15.94% d. 14.24% e. 15.02%
Explanation / Answer
Assume firm needs $100. Face amount of loan = $100/(1 0.11 0.20) = $144.9275
Discount interest = 0.11 ($144.9275) = $15.942
Compensating balance = 0.20 ($144.9275) = $28.9855
On a financial calculator, enter N = 1, PV = 100, PMT = 0, FV = 115.942
=> Compute I/Y = 15.94% is the effective annual interest rate.
Hence, c is the correct answer.
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