Suppose your firm is seeking a seven-year, amortizing $810,000 loan with annual
ID: 2740724 • Letter: S
Question
Suppose your firm is seeking a seven-year, amortizing $810,000 loan with annual payments and your bank is offering you the choice between a $861,000 loan with a $51,000 compensating balance and a $810,000 loan without a compensating balance. The interest rate on the $810,000 loan is 8.0 percent.
How low would the interest rate on the loan with the compensating balance have to be for you to choose it?(Do not round intermediate calculations and round your final answer to 2 decimal places.)
Suppose your firm is seeking a seven-year, amortizing $810,000 loan with annual payments and your bank is offering you the choice between a $861,000 loan with a $51,000 compensating balance and a $810,000 loan without a compensating balance. The interest rate on the $810,000 loan is 8.0 percent.
Explanation / Answer
1. Non compensating loan: Annual Payments on $810,000 loan at 8% using 7 year ammortizing period = $155,578.64516 (Use excel pmt function or financial calculator).
2. Compensating loan: Annual Payments have to same as non-compensating loan to get maximum interest acceptable to the company on compensating loan i.e. $155,578.64516. Principal= $861,000. Time = 7 Years. Max Interest = 6.24% (Use excel rate function or financial calculator).
So interest rate on compensating loan has to be as low as 6.24% to be able to choose it.
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