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# Effective Rate of Interest: Simple, Discounted, Installment, Compensating Balance

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Please figure the following problem so I can understand how to figure interest:

Your company plans to borrow \$5 million for 12 months, and your banker gives you a stated rate of 14 percent interest. You would like to know the effective rate of interest for the following types of loans. (Each of the following parts stands alone.)

a. Simple 14 percent interest with a 10 percent compensating balance.
b. Discounted interest.
c. An installment loan (12 payments).
d. Discounted interest with a 5 percent compensating balance.

#### Solution Preview

a. Simple 14 percent interest with a 10 percent compensating balance.
Total intereest paid= \$5.0 million *14%=\$0.7 million
Effective loan = % million - 10%*5 million = 4.5 million
Effective interest rate=0.7 ...

#### Solution Summary

The solution shows all the calculations and explanations necessary to arrive at these answers to loan and balance questions.

\$2.19