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Uptown Bank has granted a line of credit of $80,000 with an interest rate of 7.5 percent and a compensating balance requirement of 2.5 percent

Uptown Bank has granted a line of credit of $80,000 with an interest rate of 7.5 percent and a compensating balance requirement of 2.5 percent to Jones Hardware. The compensating balance requirement is based on the total amount borrowed. What is the effective annual interest rate if the firm needs $55,000 for one year to finance its inventory?

A.

8.80%
B.

8.12%
C.

7.69%
D.

9.44%
E.

7.78%

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