Problem:
Brown Inc. needs to borrow $250,000 for the next 6 months. The company has a line of credit with a bank that allows the company to borrow funds with an 8% interest rate subject to a 20% of loan compensating balance. Currently, Brown Inc. has no funds on deposit with the bank and will need the loan to cover the compensating balance as well as their other financing needs.
Required:
Question: What is the annual percentage rate for this financing assuming discounted interest?
A) 14.29%
B) 12.98%
C) 11.67%
D) 10.53%
Note: Provide support for your underlying principle.