Question

On January 1, 2020, Bonita Industries borrows $2250000 from National Bank at 13% annual interest. In addition, Bonita  is required to keep a compensatory balance of $225000 on deposit at National Bank which will earn interest at 4%. The effective interest that Bonita pays on its $2250000 loan is:

A. 13.5%.

B.

13.0%.

C.

14.0%.

D.

8.0%.

Answer 1

Here is the calculation of the effective interest rate:

effective interest rate = (interest on the principal) / (balance amount after deducting compensatory balance from principal)

   effective rate = (2250000*13%) / (2250000-225000)

effective rate = 292500 / 2025000

= 14%

So, the effective rate is always more than the nominal interest rate because of the compensatory balance that has to be kept with the bank.

Hence, the option (C). 14.0% is th right answer.

answered by: anonymous