why is the stated rate reduced again?
| A company has received a 1-year commercial bank loan of 7.5% discounted interest with a 12.5% compensating balance. The effective annual cost of the bank loan is closest to |
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Answer (A) is correct.
If a loan is offered on a discounted basis with a compensating balance requirement, the effective rate is calculated as follows:
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Effective rate
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=
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Stated rate
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1.0 – Stated rate –
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Compensating balance %
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=
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0.075
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1.0 – 0.075 – 0.125
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=
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0.09375
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=
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9.38% (rounded)
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Tayba Al-Mehdar
Analyst
Khobar
Saudi Arabia
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