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30 Apr 2019

If the ABC Co. needs a $200,000 loan for six months, what will the APR be if there is 40% compensating balance required, the interest rate is 10%, interest is not discounted and the company must borrow the funds to be used for the 40% compensating balance? (PLEASE ANSWER QUESTION USING STEPS AND WITHOUT USING EXCEL)

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Jarrod Robel
Jarrod RobelLv2
3 May 2019

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Related questions

Carey Company is borrowing $200,000 for one year at 12% from Second Intrastate Bank. The bank requires a 20% compensating balance. What is the effective rate of interest?

What would the effective rate be if Carey were required to make 12 equal monthly payments to retire the loan?

The principal refers to funds the firm can effectively utilize.

Formula:

 

​(Calculating the cost of​ short-term financing) The R. Morin Construction Company needs to borrow ​$100,000 to help finance the cost of a new ​$150,000 hydraulic crane used in the​ firm's commercial construction business. The crane will pay for itself in one​ year, and the firm is considering the following alternatives for financing its​ purchase:

Alternative A. The​ firm's bank has agreed to lend the ​$100,000 at a rate of 13 percent. Interest would be​ discounted, and a 16 percent compensating balance would be required.​ However, the​ compensating-balance requirement is not binding on the firm because it normally maintains a minimum demand deposit​ (checking account) balance of ​$25,000 in the bank.

Alternative B. The equipment dealer has agreed to finance the equipment with a​ 1-year loan. The ​$100,000 loan requires payment of principal and interest totaling ​$117,430.

a. Which alternative should Morin​ select?

b. If the​ bank's compensating-balance requirement had necessitated idle demand deposits equal to16 percent of the​ loan, what effect would this have had on the cost of the bank loan​ alternative?

QUESTION 2

The Apex Supplies Corporation needs to acquire 100 million in funds to expand their facilities. The bank has offered them a discounted loan at 10% and a compensating balance of 15%. What is the effective interest rate on this loan?

11.76%

12.05%

11.90%

13.33%

5 points

QUESTION 3

The only U.S. agency dedicated solely to financing and facilitating U.S. exports is the

Ex Im Bank

Foreign Credit Insurance Association

Bankers' Association for Foreign Trade

Agency for International Development

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