Question

Unlimited Tours has borrowed $50000 at a stated APR of 8.5 percent. The loan calls for a compensating balance of 8 percent. What is the effective interest rate for this company?

Answer 1

Solution

Here compensating balance is 8% therefore unlimited tours will be effectively able to use 92% of total loan amount as they have to keep 8% in compensating balance account

Therefore the money unlimited tours will be able to use= 50000-8%*50000=46000

Interest paid by the company= 8.5% APR of loan amount

=8.5%*50000=4250

Thus the effective interest rate is Interest paid/Amount unlimited tours will be able to utilize

=4250/46000

=0.09239

=9.239%

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