Would It Be Worth It to Incur a Compensating Balance

question 137

Multiple Choice

Would it be worth it to incur a compensating balance of $4,000 in order to get a 1.5-percent-lower interest rate on a 1-year, pure discount loan of $300,000?

• A) Yes, if the interest rate is less than 13.64 percent
• B) No, if the interest rate is less than 13.64 percent
• C) Yes, if the interest rate is more than 1.5 percent
• D) Not enough information is given to determine

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Definitions:

Premium

The excess of the issue price of bonds over their face amount; the excess of the issue price of stock over its par value.

Bonds Payable

A liability account that records the amount owed by an entity to holders of its bonds, to be repaid at a specified future date.

Straight-Line Method

An accounting method for calculating the depreciation of an asset, distributing its cost evenly across its useful life.

Interest-Bearing Note

A debt instrument that pays periodic interest payments to the holder until maturity, at which point the principal is repaid.