Compensating balances and loan interest rate

Assignment Help Finance Basics

Reference no: EM1334317

Tom Sander is a loan officer with Miami National Bank. The bank typically charges 8% APR on loans with a compensating balance requirement of 10%. In order to be competitive with other banks, Sanders will adjust the loan rate based on a customer's compensating balance level. A customer maintaining a balance greater than 10% will get a lower interest rate and customer with a balance lower than 10% will get a higher rate.

a) What is the effective interest rate on the typical loan with a nominal 8% interest rate and a 10% compensating balance?

b) Collins Construction would supply compensating balances of 150,000 and would like to borrow 2,000,000. What nominal interest rate should Sanders charge on the Collins loan in order to realize the same effective interest rate as the "typical" loan in part a?

c) Dussold Distributors would provide compensating balances of $200,000 and would like to borrow $1,000,000. What nominal interest rate should Sanders charge on the Dussold loan in order to realize the same effective interest rate as the "typical" loan in part a?

Reference no: EM1334317

Questions Cloud

Information about financial planning : Design a financial plan for them. How much would be their initial deposit? Would you use simple or compound interest? Would you compound the interest annually or monthly?

What is your salary worth in the marketplace : Explain the types of compensation that are most important to you, and that you would look for in one of these positions. Be sure to talk about any differences that would be important to you based on location or on the nature of the work.

Explain born-global firm : Explain Born-global firm and What could be the advantages and disadvantages of being a born-global firm

Equitably allocate resources among its divisions : How should senior managers equitably allocate resources among its divisions?

Compensating balances and loan interest rate : What is the effective interest rate on the typical loan with a nominal 8% interest rate and a 10% compensating balance?

How does factor evaluation system differ : How does Factor Evaluation System (FES) differ from other point factor job evaluation methodologies and provide examples of bobtailing in FES.

Explain strategic marketing planning : Explain How does strategic marketing planning for high-technology products differ from standard strategies

Concept of leaders as architects : Based on the US Army, describe a dynamic system and illustrate how a leader might create order out of chaos and In what ways is this like the concept of leaders as architects?

Hr management''s role in strategic planning : HR Management's Role in Strategic Planning - HR role from a traditionalist function to that of a strategic partner in the organization.

User Account

All Pages