Your company plans to borrow $5 million for 12 months, and your banker gives you a stated rate of 14 percent interest. Calculate the effective rate of interest for the following types of loans. a. Simple 14 percent interest with a compensating balance of 10 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.) b. Discounted interest (with no compensating balance). (Input your answer as percent rounded to 2 decimal places.) c. An installment loan (12 payments). (Input your answer as a percent rounded to 2 decimal places.) d. Discounted interest with a compensating balance of 5 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)
Your company plans to borrow $5 million for 12 months, and your banker gives you a stated rate of 14 percent interest.
Calculate the effective rate of interest for the following types of loans.
a. Simple 14 percent interest with a compensating balance of 10 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)
b. Discounted interest (with no compensating balance). (Input your answer as percent rounded to 2 decimal places.)
c. An installment loan (12 payments). (Input your answer as a percent rounded to 2 decimal places.)
d. Discounted interest with a compensating balance of 5 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)
Effective interest
Effective interest is the real return that an investor gets on his investment. It is the rate calculated by considering the market situation, stated rate, and time period of the investment. Effective interest is needed to calculate because the stated interest rate does not consider the risk factors of the investment.
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