# Effective annual rate

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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.)

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##### Solution Summary

The solution explains how to calculate the effective annual rate with compensating balance and discount loan.

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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 ...

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