Question

1/ Kenneth's Arrows and Bows borrow $14,000 for one year at 9 percent interest. What is the effective rate of interest if the loan is discounted? (Use 360 days in a year.)

Less than 9.0 percent

More than 11.0 percent

More than 10.1 percent, but less than 11.0 percent

More than 9.0 percent, but less than 10.1 percent

2/ Holland Construction Co. has an outstanding 180-day bank loan of $400,000 at an annual interest rate of 9.2%. The company is required to maintain a 13% compensating balance in its checking account. What is the effective interest rate on the loan? Assume the company would not normally maintain this average amount. (Use 360 days in a year. Round your answer to 2 decimal places.)

12.57%

9.57%

13.57%

10.57%

3/ Friedman Roses, Inc. needs $83,000 in funds for expansion. With a compensating balance requirement of 23%, how much will the firm need to borrow? (Round your answer to the nearest dollar amount.)

$107,842

$107,792

$83,000

$24,792

Answer 1

1. If the loan is discounted then the discount value (benefit) will be amortised with the interest expense making the interest less than the nominal rate of 9%.

Answer : Less than 9.0 percent

2. Given in the question,

Loan = 400000

Minimum deposit to be maintained = 13 % of Loan = 13% of 400000

                                                                =52000

Actual Loan benefit received = Loan - Minimum deposit to be maintained

                                                    =400000 - 52000

                                                     = 348000

Nominal Interest = 400000 X 9.2% = 36800

Effective interest rate = Nominal Interest/ Actual Loan benefit received X 100

                                       = 36800/348000 X 100            (Substituting the value from above)                      

                                        = 10.57%

3. Given in the question,

Fund required = 83000

Minimum balance to be maintained = 23%

Fund required = Fund borrowed - 23% of Fund borrowed

83000 = 77% of Fund borrowed       (Substituting the value from above)                      

Fund borrowed = 83000/77%

                           = $107,792