Carey Company is borrowing 200 000 for one year at 12
Carey Company is borrowing $200,000 for one year at 12 percent from Second Intrastate Bank. The bank requires a 20 percent compensating balance. What is the effective rate of interest? What would the effective rate be if Carey were required to make 12 equal monthly payments to retire the loan? The principal, as used in Formula 8–6, refers to funds the firm can effectively utilize (Amount borrowed – Compensating balance).

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