A Firm Borrows $100,000 from the Bank, but Has to Maintain

question 74

Multiple Choice

A firm borrows $100,000 from the bank, but has to maintain a compensating balance of $20,000 with the bank.The annual interest rate for the loan is 12%.What is the effective annual rate if the interest is compounded semi-annually?

• A)12.03%
• B)13.00%
• C)14.05%
• D)15.56%

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Definitions:

Zero-balance Account

A banking arrangement where a company’s bank account is maintained at a zero balance, with funds being transferred from a master account as needed.

Disbursement Purpose

The specific reason or objective for which funds are paid out or disbursed in a financial transaction.

Cheques Presented

Refers to the cheques that have been submitted to a bank for payment and are pending clearance.

Money Market Account

A type of savings account that typically offers higher interest rates, with some restrictions on withdrawal.