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You plan to borrow ​$50000 from the bank to pay for inventories for a gift shop...

You plan to borrow ​$50000 from the bank to pay for inventories for a gift shop you have just opened. The bank offers to lend you the money at 9 percent annual interest for the

3 months the funds will be needed​ (assume a​ 360-day year).

a.  Calculate the annualized rate of interest on the loan.

b.  In​ addition, the bank requires you to maintain a 20 percent compensating balance in the bank. Because you are just opening your​ business, you do not have a demand deposit account at the bank that can be used to meet the​ compensating-balance requirement. This means that you will have to put 20 percent of the loan amount​ (which you had planned to use to help finance the​ business) in a checking account. What is the cost of the loan​ now?

c.In addition to the​ compensating-balance requirement in part b​ you are told that interest will be discounted. What is the annualized rate of interest on the loan​ now?

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 10 months ago
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