Approximately what amount of compensating balance would be required for a stated interest rate of 10% to equal an effective interest rate of 10.31% on a $100,000,000 one-year loan?
Solution:
The effective interest rate of 10.31%, or 0.1031 is equal to the interest on the loan divided by the usable funds.
0.1031 = (interest on the loan) ÷ (usable funds)
0.1031 = [$100,000,000(0.10)] ÷ ($100,000,000 − x), where x = the compensating balance
Rearranging this equation,
$10,310,000 − 0.1031x = $10,000,000
$310,000 = 0.1031x
x = $3,006,789.53, or approximately $3,000,000.
Looking for help to understand the concept, please
------------------------------
Zubair
------------------------------