Question

The Clarkson Designer Company wants to borrow $750,000. The bank will provide the loan at an APR of 8.115. Since the loan calls for a compensating balance, the effective interest rate is actually 9.565 percent. What is the compensating balance on this loan? (Round answer to 1 decimal place, e.g. 12.2%.)

The compensating balance on the loan is %.

Answer 1

effective interest rate = (APR * amount borrowed) / effective balance

9.565% = (8.115% * $750,000) / effective balance

effective balance =  (8.115% * $750,000) / 9.565%

effective balance = $636,304.23

Compensating balance =  amount borrowed - effective balance

Compensating balance =  $750,000 - $636,304.23

Compensating balance =  $113,695.77

Compensating balance % = Compensating balance / amount borrowed

Compensating balance % = $113,695.77 / $750,000

Compensating balance % = 17.9%