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  • 1.  PART 2 SHORT TERM FINANCING

    Posted 09-26-2022 06:15 AM
    Dear Friends,

    I am a bit confused. Anybody help me in solving this particular question?

    Regards

    A company obtained a short-term bank loan of $500,000 at an annual interest rate of 8%. As a condition of the loan, the company is required to maintain a compensating balance of $100,000 in its checking account. The checking account earns interest at an annual rate of 3%. Ordinarily, the company maintains a balance of $50,000 in its account for transaction purposes. What is the effective interest rate of the loan?

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    TIMUCIN ONER
    Director/Manager
    ANTALYA
    Turkey
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  • 2.  RE: PART 2 SHORT TERM FINANCING

    Posted 09-27-2022 02:07 AM
    Hi, I found this. Hope it helps

    Answer (D) is correct. The $100,000 compensating balance requirement is partially satisfied by the company�s practice of maintaining a $50,000 balance for transaction purposes. Thus, only $50,000 of the loan will not be available for current use, leaving $450,000 of the loan usable. At 8% interest, the $500,000 loan would require an interest payment of $40,000 per year. This is partially offset by the 3% interest earned on the $50,000 incremental balance, or $1,500. Subtracting the $1,500 interest earned from the $40,000 of expense results in net interest expense of $38,500 for the use of $450,000 in funds. Dividing $38,500 by $450,000 produces an effective interest rate of 8.56%.

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    PHUONG NGUYEN THU
    Accountant
    Ha Noi
    Viet Nam
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  • 3.  RE: PART 2 SHORT TERM FINANCING

    Posted 09-27-2022 12:19 PM
    Dear Phuong,

    Thank you for your help. Now I understood the solution very well.

    regards

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    TIMUCIN ONER
    Director/Manager
    ANTALYA
    Turkey
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