The effective rate of interest. Introduction: Effective rate : Also termed as annual equivalent rate, it is the rate to be charged on investments and loans over a specific period of time. Compensating Balance: Also known as offsetting balance, it is the minimum balance that the borrower company needs to maintain in its bank account. This benefits the lender by lowering his cost of lending the loan.

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Chapter 8, Problem 16P

Summary Introduction

To calculate: The effective rate of interest.

Introduction:

Effective rate:

Also termed as annual equivalent rate, it is the rate to be charged on investments and loans over a specific period of time.

Compensating Balance:

Also known as offsetting balance, it is the minimum balance that the borrower company needs to maintain in its bank account. This benefits the lender by lowering his cost of lending the loan.

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