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Compute amount of the loan-determine effective interest rate

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Reference no: EM13554566

Krebsbach Company is negotiating a loan with FIS Bank. Krebsbach needs $900,000. As part of the loan agreement, FIS Bank will require Krebsbach to maintain a compensating balance of 15% of the loan amount on deposit in a checking account at the bank. Krebsbach currently maintains a balance of $50,000 in the checking account. The interest rate Krebsbach is required to pay on the loan is 12%; the interest rate FIS pays on checking accounts is 4%.

Instructions:

1. Compute the amount of the loan.

2. Determine the effective interest rate on the loan.

Reference no: EM13554566

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