Detailed Answer
(d) The requirement is to calculate the effective cost of a
loan with a compensating balance requirement. Answer (d) is
correct because the effective interest rate is equal to the interest
paid, $7,000 ($100,000 × 7%) divided by the funds that are available,
$80,000 (80% × $100,000). Therefore, the effective interest
rate is equal to 8.75% ($7,000 ÷ $80,000). Answer (a) is not
reasonable because the amount is less than the stated interest
rate. Answer (b) is incorrect because it is the stated rate. Answer
(c) is incorrect because it is computed by adding 20% of the
stated rate to the stated rate.
