LG3 P16-12 Compensating balances and effective annual rates Eastside Industries has a line of credit at...
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LG3 P16-12 Compensating balances and effective annual rates Eastside Industries has a line of credit at Bank Two that requires it to pay 13% interest on its borrowing and to maintain a compensating balance equal to 17% of the amount borrowed. The firm has borrowed $400,000 during the year under the agreement. a. Calculate the effective annual rate on the firm's borrowing if the firm normally maintains no deposit balances at Bank Two. b. Calculate the effective annual rate on the firm's borrowing if the firm normally maintains $35,000 in deposit balances at Bank Two. c. Calculate the effective annual rate on the firm's borrowing if the firm normally maintains $75,000 in deposit balances at Bank Two. d. Compare, contrast, and discuss your findings in parts a, b, and c. LG3 P16-12 Compensating balances and effective annual rates Eastside Industries has a line of credit at Bank Two that requires it to pay 13% interest on its borrowing and to maintain a compensating balance equal to 17% of the amount borrowed. The firm has borrowed $400,000 during the year under the agreement. a. Calculate the effective annual rate on the firm's borrowing if the firm normally maintains no deposit balances at Bank Two. b. Calculate the effective annual rate on the firm's borrowing if the firm normally maintains $35,000 in deposit balances at Bank Two. c. Calculate the effective annual rate on the firm's borrowing if the firm normally maintains $75,000 in deposit balances at Bank Two. d. Compare, contrast, and discuss your findings in parts a, b, and c.
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