Suppose your firm is seeking a three year, amortizing $400,000 loan with annual payments and your bank is offering you the choice between a $415,000 loan with a $15,000 compensating balance and a $400,000 loan without a compensating balance. The interest rate on the $400,000 loan is 9.5 percent. How low would the interest rate on the loan with the compensating balance have to be for you to choose it? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Interest rate %

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Effective Interest Rate

The term interest rate can be defined as the amount that is charged by the lender as a percentage on the principal amount. Interest rate which is charged annually is known as annual percentage rate.