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Unformatted text preview: : current and future economic conditions Effective Rate of Interest ERI is the actual cost of borrowing. = $ amount of interest/loan proceeds Discount versus simple interest Simple : pay all interest at the end of the loan Discount : pay all interest up front. If simple interest is used and no strings attached then the ERI and stated rate are the same. For discount ERI, subtract interest from face value in the denominator to get the load proceeds. Higher interest rate because interest is paid up front. What is a compensating balance requirement? A form of collateral; keep a percentage of loan in reserve on deposit with bank at all times. It minimizes risk for the bank. Have to subtract CBR from denominator. How to compute the amount you should borrow if you want loan proceeds to equal a particular amount. x-x(CBR%) = desired loan amount...
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- Fall '09
- Financial Markets