Detailed Answer
Answer (B) is correct. At 10%, the interest on a $500,000 loan is $50,000 per year. However, the $500,000 loan is effectively reduced to $450,000 of usable funds by the compensating balance requirement. Thus, the borrower pays $50,000 of interest for a $450,000 loan, an effective rate of 11.1% ($50,000 ÷ $450,000).