A financial institution made a $10,000, 1 year discount loan at 10 interest, requiring a compensating balance equal to 20 of the face value of the loan Determine the effective annual rate associated with this loan (Note Assume that the firm currently maintains $0 on deposit in the financial institu...

A financial institution made a $10,000, 1-year discount loan at 10% interest, requiring a compensating balance equal

Question:

A financial institution made a $10,000, 1-year discount loan at 10% interest, requiring a compensating balance equal to 20% of the of the loan. Determine the effective annual rate associated with this loan. (Note: Assume that the firm currently maintains $0 on deposit in the financial institution.)

Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...