A bank lends a firm $500,000 for one year at 8 percent and requires compensating balances of 10 percent of the face value of the loan. The effective annual interest rate associated with this loan is
A. 8.9 percent.
B. 8 percent.
C. 7.2 percent.
D. 7.0 percent.
Answer:A
A bank lends a firm $500,000 for one year at 8 percent and requires compensating balances of 10 percent of the face value of the loan. The effective annual interest rate associated with this loan is
A. 8.9 percent. B. 8 percent. C. 7.2 percent. D. 7.0 percent.