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Tucker Drillin Corp. plans to borrow $200,000. Northern National Bank will lend the money at one-half percentage point over the prime rate of 8.5% (9 percent total) and requires a compensating balance of 20 percent. Principal in this case refers to funds that the firm can effectively use in the business. What is the effective rate of interest? What would the effective rate be if Tucker Drilling were required to make four quarterly payments to retire the loan?

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Solution Summary

Tucker Drilling Corporation is examined as they plan to borrow money from the Northern National Banks. A complete, neat and step-by-step solution is provided.

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Compensating balance = 20% of 200000 = $40000

Usable principal amount = 200000 ?40000 = $160000

Interest on 200000 ...

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