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

Question

Your company plans to borrow $12 million for 12 months, and your banker gives you a stated rate of 15 percent interest. Calculate the effective rate of interest for the following types of loans.

a. Simple 15 percent interest with a compensating balance of 12 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)

Effective rate of interest ____

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

Effective rate of interest ____

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

Effective rate of interest ____

d. Discounted interest with a compensating balance of 6 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)

Effective rate of interest ____

Explanation / Answer

a. Simple 15 percent interest with a compensating balance of 12 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)

Loan Interest =12000000*15%=$1800000

Compensating Balance==12000000*12%=1440000

Effective rate of interest =Interest/(Principal - Compensating Balance)*(Days in Year/Days loan Outsatnding)

=$1800000/(12000000-1440000)*360/360=17.05%

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

Effective rate of interest=Interest/(Principal-Interest)

=$1800000/(12000000-1800000)

=17.65%

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

(2*Annual no of Payment * interest)/((Total No of Payment + 1)*Principal)

(2*12*1800000)/((12+1)*12000000)

=27.69%

Discounted interest with a compensating balance of 6 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)

Interest/(Principal - Compensating Balance-Interest)*(Days in Year/Days loan Outsatnding)

=$1800000/(12000000-12000000*6%-1800000)*(360/360)

=18.99%

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