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Maxim Air Filters Inc. plans to borrow $300,000 for one year. Northeast National Bank will lend the money at 10 percent interest and requires a compensating balance of 20 percent. What is the effective rate of interest?Maxim Air Filters Inc. plans to borrow $300,000 for one year. Northeast National Bank will lend the money at 10 percent interest and requires a compensating balance of 20 percent. What is the effective rate of interest?

Respuesta :

Answer: 12.5%

Explanation:

The effective rate of interest is simply referred to as the interest on a loan, savings account or financial product. Based on the information given in the question, the effective interest rate will be:

= Interest rate / (1 - CC)

where,

Interest rate = 10%

Compensating balance CC = 20%

= Interest rate / (1 - CC)

= 10% / (1 - 20%)

= 0.1 / (1 - 0.2)

= 0.1 / 0.8

= 0.125

= 12.5%

The effective interest rate is 12.5%

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