Rockville Corporation is going to borrow $250,000 from its bank at an APR of 8.5 percent. The bank requires its customers to maintain a 10 percent compensating balance. What is the effective interest rate on this bank loan? Round to 4 decimal places and enter percentages as a decimal.
Calculate of effective interest rate if Rockville corporation as follows:-
Amount borrowed = 250,000
Interest = 8.5%
Compensate balance = 10% on loan
Amount deposited as compensate balance = 250,000*10% = 25,000
Effective borrowing = 250,000 - 25,000 = 225,000
Interest expense = amount borrowed * interest rate
Interest expense = 21,250.
Effective interest rate = interest expense / effective borrowing amount
Effective interest rate = 9.4444%
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