Luther Industries Is Offered a $1 Million Loan for Four

question 102

Multiple Choice

Luther Industries is offered a $1 million loan for four months at an APR of 9%. If Luther's bank requires that the firm maintain a compensating balance equal to 10% of the loan amount in a non-interest-earning account, then the effective annual rate EAR for this loan is closest to ________.

• A) 10.3%
• B) 12.6%
• C) 14.4%
• D) 71.5%

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Definitions:

Contract Rate

The agreed-upon interest rate specified in a contract, often related to loans or financial agreements.

Bond Indenture

A legal contract specifying the terms and conditions under which bonds are issued, including details of interest payments and the maturity date.

Contract Rate

The agreed-upon interest rate specified in a contract, often relating to loans or bond issues.

Effective Rate

The interest rate on a loan or financial product, rephrased to reflect the actual annual cost of the product over its repayment term.