Hagar Company’s bank requires a compensating balance of 20 on a $100,000 loan. If the stated interest on the loan is 7%, what is the effective cost of... Accounting MCQs | Accounting MCQs

Hagar Company’s bank requires a compensating balance of 20 on a $100,000 loan. If the stated interest on the loan is 7%, what is the effective cost of the loan?

5.83%
7.00%
8.40%
8.75%Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (D) is correct. The effective interest rate on a loan with a compensating balance can be calculated as follows: Effective rate = Stated rate ÷ (1.0 – Compensating balance %) = 7% ÷ (100% – 20 = 7% ÷ 80% = 8.75 Note that the amount of the loan is not needed to calculate the effective rate.