The treasurer for the Macon Blue Sox baseball team is seeking a $20,100 loan for one year from the 4th National Bank of Macon. The stated interest rate is 19 percent, and there is a 23 percent compensating balance requirement. The treasurer always keeps a minimum of $1,670 in the baseball team’s checking accounts. These funds count toward meeting any compensating balance requirements.

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anthougo anthougo · Answer 1 · 2022-03-25T12:25:48+01:00

The effective interest rate based on a compensating balance requirement of 23% for Macon Blue Sox is 24.675%.

The compensating balance requirement is the minimum amount of cash that a borrower cannot withdraw from a loan account.

The compensating balance requirement is a standard requirement of some lending institutions to reduce default risks.

Loan = $20,100

Stated interest rate = 19%

Interest expense = $3,819

Compensating balance requirement = 23%

= $4,623 ($20,100 x 23%)

Amount received as Cash = $15,477 ($20,100 - $4,623)

Effective interest rate = 24.675% ($3,819/$15,477 x 100)

What will be the effective rate of interest on this loan?

Thus, the effective interest rate based on a compensating balance requirement of 23% for Macon Blue Sox is 24.675%.

Learn more about compensating balance requirements at https://brainly.com/question/15866312