Purchase Solution

Compensating Balances.

Not what you're looking for?

Ask Custom Question

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?

Purchase this Solution
Solution Summary

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.

Solution Preview

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. ...

Purchase this Solution
Free BrainMass Quizzes
Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

View More Free Quizzes
Related BrainMass Solutions

  • Loans and Effective Interest Rates

    Recomputed the effective cost of interest, assuming Columbus ordinarily maintains $20,000 at each bank in deposits that will serve as compensating balances. c. How much did the compensating balances inflate the percentage interest costs?

  • Effective Interest Rate and Compensating Balances

    c) Dussold Distributors would provide compensating balances of $200,000 and would like to borrow $1,000,000.

  • Compensating balances and effective annual rates

    281110 Compensating Balances and Effective Annual Rates Company X has a line of credit at Bank A that requires it to pay 11% interest on its borrowing and to maintain a compensating balance equal to 15% of the amount borrowed.

  • Compensating Balances

    232604 Dynamic Sofa: Explain how Compensating Balances work in 3 scenarios Compensating Balances.

  • Additional client representations obtained by an auditor

    a) Compensating balances and other arrangements involving restrictions on cash balances have been disclosed To have proper disclosure of all compensating balances or other restrictions on cash.

  • Miami National Bank: Compensating balances vs loan interest rate.

    c) Dussold Distributors would provide compensating balances of $200,000 and would like to borrow $1,000,000.

  • advantages of compensating balances for banks

    17328 Advantages of compensating balances for banks What advantages do compensating balances have for banks? Are the advantages to banks necessarily disadvantages to corporations?

  • Compensation Balances Revenues

    c) Dussold Distributors would provide compensating balances of $200,000 and would like to borrow $1,000,000.

  • Calculating effective interest rate of a loan

    492135 Calculating effective interest rate of a loan 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.

  • Compensating Balances

    22167 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.

View More Related Solutions