Effective annual rate:
A financial institution made a $10,000, 1-year discount loan at 10% interest, requiring a compensating balance equal to 20% of the face value of the loan. Determine the effective annual rate associated with this loan. (Note: Assume that the firm currently maintains $0 on deposit in the financial institution.)© BrainMass Inc. brainmass.com December 15, 2022, 8:19 pm ad1c9bdddf
Effective annual rate = Interest paid/Amount actually utilized.
In the case there is a discount loan with compensating balance. In a discount loan the interest amount is deducted upfront ...
The solution explains how to calculate the effective annual rate with compensating balance and discount loan.