Suppose Your Firm Is Seeking a Seven-Year, Amortizing $400,000 Loan

question 36

Multiple Choice

Suppose your firm is seeking a seven-year, amortizing $400,000 loan with annual payments and your bank is offering you the choice between a $410,000 loan with a $10,000 compensating balance and a $400,000 loan without a compensating balance. If the interest rate on the $400,000 loan is 9.5 percent, how low would the interest rate on the loan with the compensating balance have to be in order for you to choose it?

• A) The rate would have to be lower than 8.76 percent.
• B) The rate would have to be lower than 8.29 percent.
• C) The rate would have to be lower than 8.14 percent.
• D) The rate would have to be lower than 7.99 percent.

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Definitions:

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A list or record of individuals and families who receive assistance from government welfare programs.

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Forms of compensation provided to employees or beneficiaries that are not paid out in cash, such as health insurance, pension contributions, and food assistance.