Problem: The Dade Company is borrowing $300,000 for one year and paying $27,000 in interest to Miami National Bank. The Bank Requires a 20 percent compensating balance. Waht is the effective rate of interest? What would be the effective rate if the company were required to make 12 monthly payments to retire the loan? The Principal, as used in formula used below refers to the fund the firm can effectively utilize (amount borrowed-compensating balance)
Effective rate on installment loans= 2X Annual no. of payments x interest
(Total no. of Payments +1) x Principle