Unformatted text preview: a. If the bank requires a 20% minimum compensating balance, how much will Kramerica be able to effectively use? The bank will borrow $125,000 to use 100,000. b. If the bank quotes a rate of 8%, what is the effective rate on this loan with the compensating balance requirement? 8% / 1 – 20% = 10% c. If Kramerica needs to use $100,000, how much must be borrowed? 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 / 37 * 60,000 = 288,000 / 2,220,000 = 13% 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? 12% / (1 20%) = 15% is the effective interest rate....
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 Spring '11
 Dr.Jones
 Finance, Debt, Interest, National Bank, Upstart Bank

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