Capone Child Care Centers, Inc., plans to borrow $250,000 for one year at 10 percent from the Chicago Bank and Trust Company. There is a 20 percent compensating balance requirement. Capone keeps minimum transaction
balances of $18,000 in the normal course of business. This idle cash counts toward meeting the compensating balance requirement. What is the effective rate of interest?
The solution shows the steps to compute the rate of interest.