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    Calculating the Effective Interest Rate

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    William Miklo is opening a new business and the bank will not give him a loan without a 20% compensating balance account. He needs $50,000 at 15% interest for one year and they want their interest in advance. What is the real interest rate they are charging him?

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    Though the borrower is paying interest on a compensating balance, he or she does ...

    Solution Summary

    This solution illustrates how to compute the effective interest rate for a business loan with a compensating balance.