Answer: 12.67%
Explanation:
The effective interest rate on a borrowing is the net annual interest cost divided by the net available proceeds from the borrowing. Dichter gross annual interest cost is $240,000 ($2,000,000 x 12%). Dichter is required to maintain a compensating balance of $400,000, which is $200,000 more than their normal balance of $200,000. Therefore, Dichter earns incremental annual interest revenue of $12,000 ($200,000 x 6%) on the excess compensating balance. The net annual interest cost is $228,000 ($240,000 - $12,000). The net available proceeds from the borrowing is $1,800,000 ($2,000,000 loan less $200,000 excess compensating balance). Therefore, the effective annual interest rate is 12.67%
Answer:
The annual effective interest rate based on a 360 day period is 12.67%
Explanation:
The effective interest rate for a 180 day borrowing period is the ratio of net interest cost to net available proceeds.
The net interest cost = the gross interest cost - the incremental interest revenue.
The gross interest cost = $2,000,000 × 12% × (6 months ÷ 12 months) = $2,000,000 × 0.12 × 0.5 = $120,000
the incremental interest revenue = $200,000 × 6% × (6 months ÷ 12 months) = $200,000 × 0.06 × 0.5= $6,000
Since the net interest cost = the gross interest cost - the incremental interest revenue
Net interest cost = $120,000 - $6,000 = $114,000
net available proceeds = $2000000 - $200000 = $1800000
Therefore, the effective interest rate based om a 180 day period = net interest cost/net available proceeds = $114,000 / $1,800,000 = 0.0633 = 6.33%
The annual effective interest rate based on a 360 day period = 6.33% × 2 = 12.67%
