Bank Two Extends a $3 Million Line of Credit to Capital

question 72

Multiple Choice

Bank Two extends a $3 million line of credit to Capital Corp. The stated rate of interest is 9.5%. Bank Two requires Capital to maintain compensating balances equal to 10% of the amount of the line. Assuming that Capital would not normally carry any deposits at the bank, what is the effective annual rate of interest on the loan?

• A) 9.5%
• B) 10.6%
• C) 11.6%
• D) 12.3%

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Definitions:

Risk Averse

A description of an individual or entity that prefers to avoid risk or chooses lower risk options when faced with uncertainty, often prioritizing security over potential higher returns.

Utility Function

A mathematical representation describing how consumers rank different bundles of goods based on the level of satisfaction they provide.

Marginal Utility

The extra pleasure or benefit derived from the consumption or utilization of an additional unit of a product or service.

Marginal Utility

The additional satisfaction or usefulness obtained from acquiring or consuming one more unit of a good or service.