Your company plans to borrow $11 million for 12 months, and your banker gives yo

Question

Your company plans to borrow $11 million for 12 months, and your banker gives you a stated rate of 22 percent interest.

Calculate the effective rate of interest for the following types of loans.

Simple 22 percent interest with a compensating balance of 22 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)

Discounted interest (with no compensating balance). (Input your answer as percent rounded to 2 decimal places.)

An installment loan (12 payments). (Input your answer as a percent rounded to 2 decimal places.)

Discounted interest with a compensating balance of 11 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)

Your company plans to borrow $11 million for 12 months, and your banker gives you a stated rate of 22 percent interest.

Explanation / Answer

A)

$2,420,000 / ($11,000,000 - $2,420,000) = 0.2820 or 28.20%

B)

$2,420,000 / ($11,000,000 - $2,420,000) = 0.2820 or 28.20%

C)

2*12*$2,420,000 / 13* $11,000,000 = 0.4061 or 40.61%

D)

$2,420,000 / ($11,000,000 - $2,420,000 - $1,210,000) = 0.3283 or 32.83%

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