What is the effective interest rate if you need $85,500 for one year to cover your operating expenses?
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Fancy Footwear has a line of credit with your local bank for $100,000. The loan agreement calls for interest of 11 percent with a 3 percent compensating balance requirement which is based on the total amount borrowed. What is the effective interest rate if you need $85,500 for one year to cover your operating expenses?
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Answer:
Since bank credits are " daily compounded" 11% annual rate will be 11.63% effective.
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