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28 April, 19:09

Assume that the amount that you have to actually borrow for your ski and bike rental business mentioned in the previous question is $18,000. If it is still a one year loan and the bank will charge 4% discount interest and require a 10% compensating balance, then determine the effective annual interest rate that the bank is charging.

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  1. 28 April, 19:24
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    4.65%

    Explanation:

    Data provided in the question:

    Amount borrowed = $18,000

    Discount Interest rate = 4% = 0.04

    Required compensating balance = 10%

    Now,

    Effective loan rate on Discount Loan with compensating balance is given as

    ⇒ [ (Interest rate) : (1 - interest %-Compensating balance%) ] * 100%

    ⇒ [ 4% : (1 - 4% - 10%) ] * 100%

    ⇒ [ 0.04 : (1 - 0.04 - 0.10) ] * 100%

    ⇒ [ 0.04 : 0.86 ] * 100%

    ⇒ 4.65%
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