NominalCostofTradeCredit=100-Discount%Discount%CostlyTradeCreditPeriod365EffectiveAnnualRate(EAR)=(1+Nrnominal)N1 Net borrowing amount on a loan = Face value of loan (1% comp. bal. % discount interest ) Steps for calculating a nominal and effective annual rate for a loan - Determine the face value of the loan (if needed). - Calculate the interest and compensating balance (if needed). - Draw a cash flow timeline of the loan cashflows. - Use the TVM keys to find the I/Y (multiply it by the payments per year after calculated) - Use the ICONV or the EAR equation above to calculate the effective rate. Suppose you borrow $220,000 from a bank for one year at a stated annual interest rate of 11 percent, with interest prepaid (discount interest). Also, assume that the bank requires you to maintain a compensating balance equal to 15 percent of the initial loan value. What effective annual interest rate are you being charged? 14.86% 16.28% 11.00% 12.57%