Question

You plan to borrow ​$30,000 from the bank to pay for inventories for a gift shop...

You plan to borrow ​$30,000 from the bank to pay for inventories for a gift shop you have just opened. The bank offers to lend you the money at 10 percent annual interest for the 6 months the funds will be needed.

a. Calculate the effective rate of interest on the loan.

b. In​ addition, the bank requires you to maintain a compensating balance of 15 percent in the bank. Because you are just opening your​ business, you do not have a demand deposit account at the bank that can be used to meet the​ compensating-balance requirement. This means that you will have to put up 15 percent of the loan amount from your own personal money​ (which you had planned to use to help finance the​ business) in a checking account. What is the cost of the loan​ now?

c. In addition to the​ compensating-balance requirement in part ​(b​), you are told that interest will be discounted. What is the effective rate of interest on the loan​ now?

a. What is the effective rate of​ interest, or APR​, on the​ loan? ___% ​(Round to two decimal​ places.)

b. If the bank requires you to maintain a compensating balance of 15 percent in the​ bank, what is the effective annual cost of the loan​ now? ___% ​ (Round to two decimal​ places.) c

. In addition to the​ compensating-balance requirement in part ​(b​), you are told that interest will be discounted. What is the effective rate of interest on the loan​ now? ____% ​(Round to two decimal​ places.)

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Answer #1

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