You Must show your work and include all Formulas used. See example
Solution below.
Compensating Balances. A bank loan has a quoted annual rate of 6
percent. However, the borrower must maintain a balance of 25 percent of
the amount of the loan, and the balance does not earn any interest.
a. What is the effective rate of interest if the loan is for 1 year and
is paid off in one payment at the end of the year?
b. What is the effective rate of interest if the loan is for 1 month?
Business Homework Solutions
#22167
Compensating Balances
Compensating Balances. A bank loan has a quoted annual rate of 6 percent. However, the borrower must maintain a balance of 25 percent of the amount of the loan, and the balance does not earn any interest.
a. What is the effective rate of interest if the loan is for 1 year and is paid off in one payment at the end of the year?
b. What is the effective rate of interest if the loan is for 1 month?
Problem is attached as a Word document. You must show your work and all formulas.
Attached file(s):
- Compensating Balances(12).doc View File
Calculates effective rate of interest on the loan where the borrower must maintain a compensating balance.
What is this?
By OTA - Overall OTA Rating
Parool Agarwal, CA (IP) - 4.9/5
Purchase Cost Now
$2.19 CAD (was ~$11.97)
Included in Download
- Plain text response
- Attached file(s):
- 22167-compensating balance.xls
Why you can trust BrainMass.com
- Your Information is Secure
- Best Online Academic Help Service
- Students find real academic Success
- Financial Management - Your firm is considering the following three alternative bank loans for $1,000,000: a) 10% loan paid at year end with no compensating balance b) 9% loan paid at year end with a 20% compens ...
- Compensating balances - Tom Sander is a loan officer with Miami National Bank. The bank typically charges 8% APR on loans with a compensating balance requirement of 10%. In order to be competitive with other banks, Sanders w ...
- Compensating balances and effective annual rates: Calculate effective annual rate - Company X has a line of credit at Bank A that requires it to pay 11% interest on its borrowing and to maintain a compensating balance equal to 15% of the amount borrowed. The company has borrowed $800 ...
- Miami National Bank: Compensating balances vs loan interest rate. - Tom Sander is a loan officer with Miami National Bank. The bank typically charges 8% APR on loans with a compensating balance requirement of 10%. In order to be competitive with other banks, Sanders w ...
- Compensationg Balances rev - Tom Sander is a loan officer with Miami National Bank. The bank typically charges 8% APR on loans with a compensating balance requirement of 10%. In order to be competitive with other banks, Sanders w ...
- Annual Rate - P15-9 Effective annual rate A financial institution made a $10,000, 1-year discount loan at 10% interest, requiring a compensating balance equal to 20% of the face value of the loan. Determin ...
- Annual Rate - Effective annual rate A financial institution made a $10,000, 1-year discount loan at 10% interest, requiring a compensating balance equal to 20% of the face value of the loan. Determine the effective ...
- Dynamic Sofa: Explain how Compensating Balances work in 3 scenarios - Compensating Balances. Suppose that Dynamic Sofa (a subsidiary of Dynamic Mattress) has a line of credit with a stated interest rate of 10 percent and a compensating balance of 25 percent. The compe ...
- Compensating Balances. - Suppose that Dynamic Sofa (a subsidiary of Dynamic Mattress) has a line of credit with a stated interest rate of 10 percent and a compensating balance of 25 percent. The compensating balance earns no ...
- Midland Chemical: Compensating balances, cash discount, hedging, effective rates - Midland Chemical Co. is negotiating a loan from Manhattan Bank and Trust. The small chemical company needs to borrow $500,000. The bank offers a rate of 8¼ percent with a 20 percent compensating b ...
- Sample finance problem (Summit Record Company) - I need help solving chapter 8: number 25. Please see ** ATTACHED ** file(s) for complete details!!
- Midland chemical co.(compensating,balances,cash, discount, hedging) - This is a model problem that I must study. I need step by step help with the solution. Midland Chemical Co. is negotiating a loan from Manhattan Bank and Trust. The small chemical company needs to ...
- Effective annual rate - Effective annual rate A financial institution made a $10,000, 1-year discount loan at 10% interest, requiring a compensating balance equal to 20% of the face value of the loan. Determine the effective ...
- Business interest rates - James Supply needs to borrow $150,000 for 6 months. Canada Bank has offered to lend the funds at a 9% annual rate subject to a 10% compensating balance. (Note: James currently maintains $0 on deposi ...
- Cost of bank loan - A bank loan agreement calls for an interest rate equal to prime rate plus 1%. If prime rate averages 9% and non-interest-earning compensating balances equal to 10% of the loan must be maintained, what ...
- sustainable growth rate, effective rate of interest - 1) A firm's profit margin is 10% and its asset turnover ratio is .6. It has no debt, has net income of $10 per share, and pays dividends of $4 per share. What is the sustainable growth rate? 2) A ...
- Expected value and Compensating balances with idle balances - I have 2 problem that I need help with. The first is the expected value of Gary's Pipe and Steel. The second is Niemans Supermarkets Compensating balances with idle balances. I have attached the p ...
- Compute the Effective Annual Interest Rate: line of credit with compensating balance - Your bank offers you a $100,000 line of credit with an interest rate of 2.5% per quarter. The loan agreement also requires that 4% of the unused portion of the credit line be deposited in a non-intere ...
- Comprehensive Problem - Loan Scenarios Midland Chemical Co. is negotiating a loan from Manhattan Bank and Trust. The small chemical company needs to borrow $500,000. The bank offers a rate of 8¼ percent with a 20 perce ...
- Loans and compensating balances - # 22 page 233 Columbus shipping co is negotiating with 2 banks for a 100,000 loan. Bankcorp of Ohio requires a 20 percent compensating balance, discounts the loan, and wants to be paid back in fou ...
- Mime Theatrical Supply: calculate effective interest rate - Mime Theatrical Supply is in the process of negotiating a line of credit with two local banks. The prime rate is currently 8 percent. The terms follow: Bank Loan Terms 1st National 1 percent abo ...
- Financing foreign operations - effective percentage cost - Apex Supplies borrows £1 million at 12 percent, payable in one year. If Apex is required to maintain a compensating balance of 20 percent, what is the effective percentage cost of its loan (in pounds ...
- Working Captial Financial Problem - 1. Economic Order Quantity. A large consulting firm orders photocopying paper by the carton. The firm pays a $30 delivery charge on each order. The total cost of storing the paper, including forgone ...
- Effective Rate of Interest: simple, discounted, installment, compensating balance - Please figure the following problem so I can understand how to figure interest: Your company plans to borrow $5 million for 12 months, and your banker gives you a stated rate of 14 percent interest ...
- a) What is the effective rate on the bank loan? b)How much would it cost (in percentage term) if the firm did not take the cash discount, but paid the bill in 70 days instead of 10 days? c) Should the firm borrow the money to take the discount? Text Book Foundations of Financial Management 10ed. by Stanley B Block and Geoffrey A Hirt from McGraw-Hill - Neveready Flashlights, Inc needs $300,000 to take a Cash discount of 2/10, net 70. A banker will loan the money for 60 days at an interest cost of $5,500. a) What is the effective rate on the bank ...
