What is the effective annual interest rate

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Reference no: EM13265857

Short-term loan with discount interest and a compensating balance.

Wyoming State Bank has agreed to lend you $5,000 for 1 year at a stated annual interest rate of 5%, with interest prepaid (this is a discounted loan). The bank is also requiring you to maintain a compensating balance equal to 15% of the initial loan value.

Question 1: How much do you need to actually borrow from the bank to have $5,000 of usable funds? Check figure: Face value of loan = $6,250.00.

Question 2: What is the effective annual interest rate that you are being charged by the bank? Hint: Use your financial calculator's TVM keys and solve for i.

Reference no: EM13265857

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