You are required to hold a compensating balance on a loan of 15%. You will borrow money today, and one year from today you will make a single interest payment and pay off the balance of the loan (It is an annual loan with annual compounding.) You need 1,700,000 in order to fund a project. The annual interest rate on the loan is 9.5%.
a. What will the principal of the loan have to be in order for you to meet your funding needs?
b. What are the cash flows of the loan? Be sure to show what is available to you.
c. What is the EAR (effective annual rate) of the loan, taking into account that the loan requires a compensating balance?