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Unformatted text preview: a. If the bank requires a 20% minimum compensating balance, how much will Kramerica be able to effectively use? b. If the bank quotes a rate of 8%, what is the effective rate on this loan with the compensating balance requirement? c. If Kramerica needs to use $100,000, how much must be borrowed? a. 100,000 × 80% = 80,000 b. 8% / (1 – 20%) = 10% c. 100,000 / (1 – 20%) = 125,000 3. Vandelay Industries is borrowing $60,000 from Morehead State Bank. The total interest is $12,000. The loan will be paid by making equal monthly payments for the next three years. What is the effective rate of interest on this installment loan? (2 × 12 × 12,000) / [(36 + 1) × 60,000] = 12.97% 4. A company plans to borrow $2 million for a year. The stated interest rate is 12%. If there is a 20% compensating balance requirement, what is the effective interest rate? (2,000,000 × 12%) / (2,000,000 – 400,000) × 360 /360 = 15%...
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 Spring '11
 Dr.Jones
 Finance, Debt, Interest, National Bank

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