38. Juno Industrial Supply has a $150,000 line of credit with a 6.5 percent inte

Question

38. Juno Industrial Supply has a $150,000 line of credit with a 6.5 percent interest rate. The loan agreement requires a 2 percent compensating balance, which is based on the total amount borrowed, and which will be held in an interest-free account. What is the effective interest rate if the firm borrows $91,800 on the line of credit for one year?     

A.        6.42 percent

B.        6.47 percent

C.        6.50 percent

D.        6.58 percent

E.         6.63 percent

Explanation / Answer

E. 6.63 percent

Effective amount borrowed = 91800-2%*91800 = 89964

Interest Amount = 91800*6.5% = 5967

Effective interest = 5967/89964 *100 = 6.63%

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