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Effective Rate of Interest

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Tucker Drilling Corp. palns to borrow $200,000. Northern National Bank will lend the money at one-half percentage point over the prime rate of 8 1/2 percent (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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The effective rate of interest are examined.

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Based off of the phrasing of the question, I am assuming that the question assumes that the loan is paid back in 1 years time?? Not exactly sure what the compensating balance and principal comments have to do with this question, possibly there ...

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