Carey Company is borrowing $200,000 for one year at 12 percent from Second Intrastate Bank. The bank requires a 20 percent compensating balance. The principal refers to funds the firm can effectively utilize (Amount borrowed Compensating balance). a. What is the effective rate of interest? (Use a 360-day year. Input your answer as a whole percent.) b. What would the effective rate be if Carey were required to make 12 equal monthly payments to retire the loan? (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)
Input variables:
Amount borrowed	$200,000
Loan term	360	days
Interest rate	0.12
Compensating balance requirement	0.20
Days in year	360	days
b. Annual number of loan payments	12
b. Total number of loan payments	12
Solution and Explanation:
a.
Loan interest
Compensating balance
Effective rate
b.
Loan interest
Compensating balance
Effective rate =		/
Effective rate