Computing effective annual interest rate, Accounting Basics

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Computing effective annual interest rate

Problem:

Come and Go Bank offers your firm a 8 percent discount interest loan for up to $28 million, and in addition requires you to maintain a 5 percent compensating balance against the face amount borrowed.

Requirement:

Question: What is the effective annual interest rate on this lending arrangement?

Note: Show all workings.

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Accounting Basics: Computing effective annual interest rate

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Accounting Basics: Computing effective annual interest rate

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