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(Estimating the cost of bank credit) Paymaster Enterprises has arranged to finance its seasonal working-capital needs...
(Estimating the cost of bank credit) Paymaster Enterprises has arranged to finance its seasonal working-capital needs with a short-term bank loan. The loan will carry a rate of 88 percent per annum with interest paid in advance (discounted). In addition, Paymaster must maintain a minimum demand deposit with the bank of 1010 percent of the loan balance throughout the term of the loan. If Paymaster plans to borrow $1 comma 000 comma 0001,000,000 for a period of 66 months, what is the effective cost of the bank loan? Hint: Assume the Paymaster does not have sufficient funds in the bank to satisfy the compensating balance requirement. The effective cost, or APR, of the bank loan is?
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