Solved – Gifts Galore Inc. borrowed $1.5 million from National City Bank. The loan was made at a simple annual interest rate of 9% a year for 3 months

Question

Gifts Galore Inc. borrowed $1.5 million from National City Bank. The loan was made at a simple annual interest rate of 9% a year for 3 months. A 20% compensating balance requirement raised the effective interest rate.
a. The nominal annual rate on the loan was 11.25%. What is the true effective rate?
b. What would be the effective cost of the loan if the note required discount interest?
c. What would be the nominal annual interest rate on the loan if the bank did not require a compensating balance but required repayment in 3 equal monthly installments?

Answer

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