Question

What is the effective rate of borrowing $100,000 through a 5% note when 3% of the proceeds are required to be maintained on deposit through the term of the note?

		None of these is correct
		4.85%
		5.00%
		4.76%
		2.86%
		5.15%

Answer 1

Amount of borrowing = $100,000

Interest rate = 5%

Interest expense = Amount of borrowing x Interest rate

= 100,000 x 5%

= $5,000

Amount to kept as deposit = 3% of borrowing

= 100,000 x 3%

= $3,000

Net amount received on borrowig = Amount of borrowing - Amount to kept as deposit

= 100,000 - 3,000

= $97,000

Effective rate of borrowing = Interest expense/Net amount received on borrowig

= 5,000/97,000

= 5.15%

Fifth option is the correct option

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