Cheap Money Bank offers your firm a discount interest loan at 8.25% for up to $25 million and, in addition, requires you to maintain a 15 percent compensating balance against the amount borrowed. What is the effective annual interest rate on this lending arrangement?

10.75%

Explanation:

The computation of the effective annual interest rate is shown below:

= Interest : total net amount available

where,

Total net amount available would be

= Loan amount - Loan amount * interest rate - loan amount * compensating percentage

= $25,000,000 - $25,000,000 * 8.25% - $25,000,000 * 15%

= $25,000,000 - $2062,500 - $3,750,000

= $19,187,500

And, the interest would be $2,062,500

Now put these values to the above formula

So, the rate would equal to

= $2,062,500 : $19,187,500

= 10.75%