# Compensating Balances.

Compensating Balances. A bank loan has a quoted annual rate of 6 percent. However, the borrower must maintain a balance of 25 percent of the amount of the loan, and the balance does not earn any interest.

A. What is the effective rate of interest if the loan is for 1 year and is paid off in one payment at the end of the year?

B. What is the effective rate of interest if the loan is for 1 month?

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Compensating Balances. A bank loan has a quoted annual rate of 6 percent. However, the borrower must maintain a balance of 25 percent of the amount of the loan, and the balance does not earn any interest.

A. ...

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This solution is comprised of a detailed explanation to answer what is the effective rate of interest if the loan is for 1 year and is paid off in one payment at the end of the year and what is the effective rate of interest if the loan is for 1 month.