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Calculating effective interest rate of a loan

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problem: compensating balances with idle cash balances.

The treasurer for Macon Blue Sox baseball team is seeking a $20000 loan for one year from the 4th National Bank of Macon. The stated interest rate is 10%,and there is a 15% compensating balance requirement. The treasurer always keeps a minimum of $1500 in the baseball team's checking accounts.These funds count toward meeting any compensating balance requirements.
What will be the effective rate of interest on this loan?

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Solution Preview

10% of 20,000 is 2000. Then the compensating balance of 15% would be 3000. Thus...

e = ...

Solution Summary

In this solution we take some data given in a problem regarding the calculation of effective interest rate and add in some complexity. How do we calculate effective interest rate in the presence of a compensatory balance? Download this solution to find out!