Would It Be Worth It to Incur a Compensating Balance

question 71

Multiple Choice

Would it be worth it to incur a compensating balance of $10,000 in order to get a 1-percent-lower interest rate on a 1-year, pure discount loan of $500,000?

• A) yes
• B) no
• C) not enough information is given to know It depends upon whether $500,000 x (1 + i) or $510,000 x (1 + [i -.01]) is larger. The compensating balance for the lower loan rate will make sense if:
• $500,000 x (1 + i ) > $510,000 x (1 + [i -.01])
• ($500,000/$510,000) x (1 + i) > (1 + [i - .01])
• )9804 + .9804i > 1 + i - .01
• -)0196i > .0096
• I < -.4697959
• In other words, only if the rate is less than -46.98%. Since this is not likely to happen, the lower rate associated with the compensating balance isn't worth it.

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Definitions:

Abstinence

The act of refraining from indulging in something, often used in the context of abstaining from sexual activity or substances like alcohol and drugs.

STI Prevention

Strategies and practices aimed at reducing the risk of acquiring sexually transmitted infections, such as safe sex practices and regular screenings.

Curable STI

A sexually transmitted infection that can be effectively treated and completely eradicated with appropriate medical intervention.

Chlamydia

A sexually transmitted infection caused by the bacterium Chlamydia trachomatis, often asymptomatic but treatable with antibiotics.