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8 September, 15:00

Your company plans to borrow $12 million for 12 months, and your banker gives you a stated rate of 21 percent interest. Calculate the effective rate of interest for the following types of loans. a. Simple 21 percent interest with a compensating balance of 12 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)

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  1. 8 September, 16:32
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    The correct answer is 23.86%.

    Explanation:

    According to the scenario, the given data are as follows:

    Loan amount = $12,000,000

    Time period = 12 months

    Rate of interest = 21%

    compensating balance = 12%

    So we can calculate the effective rate of interest by using following method:

    Effective rate of interest = (Loan amount * Interest Rate) : Loan amount * (1 - compensating balance)

    By putting the value, we get:

    = ($12,000,000 * 0.21) : ($12,000,000 * (1-0.12)

    = 0.2386 or 23.86%
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