Question

ABC borrowed $413,310,000 from the bank for one year at an annual rate of 10.5%. Under the terms of the loan, there are no payments during the year -- ABC just repays principal and interest at the end of the year. However, since ABC typically keeps no money in its account with this bank, the loan also requires ABC to maintain a compensating balance of 15%. What is the equivalent simple interest rate for this transaction? Show your answer in decimal form to four places (e.g., 12.34% would be entered as 0.1234)

Answer 1

Loan Amount= $ 413,310,000

Annual interest rate= 10.5%

So,

Interest to be paid to bank = 10.5%* $ 413,310,000

Interest to be paid to bank = $ 43,397,550

As ABC keep 15% of loan amount in bank as compensating balance.

So,

Compensating balance= 15% of loan amount

Compensating balance = 15% * $ 413,310,000

Compensating balance  = $ 61,996,500

Actual loan amount used by ABC= Loan borrrowed - Compensating balance

Actual loan amount used by ABC= $ 413,310,000 - $ 61,996,500

Actual loan amount used by ABC = $ 351,313,500

Equivalent simple interest rate= Interest paid/ Loan amount used

Equivalent simple interest rate =  $ 43,397,550 / $ 351,313,500

Equivalent simple interest rate = 0.1235

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