Question

Morgan Contractors borrowed $1.80 million at an APR of 6.0 percent. The loan called for a compensating balance of 6 percent. What is the effective interest rate on the loan? (Round intermediate calculations to 4 decimal places, e.g. 1.2541 and final answer to 2 decimal places, e.g. 12.25%.)

The effective interest rate on the loan is %.

Answer 1

Amount Borrowed = $ 18,00000

Given APR = 6%

Compensating Balance = 6%

Amount deposited as Compensating Balance = $ 18,00000*6%

= $ 108000

Effective Borrowing Amount = Borrowed Amount - Compensating Balance amount

= $ 1800000-$ 108000

= $ 1692000

Interest Expense = $ 1800000*6%

= $ 108000

Effective Intrest rate =( Interest Expense/ Effective Borrowing Amount) *100

= ($ 108000/ $ 1692000)*100

= 6.38%

Hence Effective Annual interest is 6.38%.

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