Holland Construction Co. has an outstanding 180-day bank loan of $404,000 at an

Question

Holland Construction Co. has an outstanding 180-day bank loan of $404,000 at an annual interest rate of 9.5%. The company is required to maintain a 17% compensating balance in its checking account. What is the effective interest rate on the loan? Assume the company would not normally maintain this average amount. (Use 360 days in a year. Round your answer to 2 decimal places.)

A.13.45%

B.11.45%

C.10.45%

D.14.45%

Holland Construction Co. has an outstanding 180-day bank loan of $404,000 at an annual interest rate of 9.5%. The company is required to maintain a 17% compensating balance in its checking account. What is the effective interest rate on the loan? Assume the company would not normally maintain this average amount. (Use 360 days in a year. Round your answer to 2 decimal places.)

Explanation / Answer

Given are following data :

Outstanding bank loan amount = $404,000

Percentage of compensating balance = 17%

Therefore , amount of compensating balance = 17% of $404,000 = $ 68680

Therefore , Available principal = $404,000 - $ 68680 = $335320

Quantum of 180 days loan at an interest rate of 9.5% on an principal amount of $ 404,000

= ( 180 days / 360 days ) x $404,000 x 0.095

= $19190

Therefore Effective interest rate for 180 days = $19190 / Available principal = $19190 / $335320 X 100 = 5.722

Hence annual effective interest rate ( i.e. effective interest rate for 360 days) = 360/180 x 5.722% = 11.444 % ( 11.45% rounded to 2 decimal places )

ANSWER :    B ) 11.45 %

ANSWER :    B ) 11.45 %

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