Big Bank B offers your company 20000000 loan with an interes

Big Bank B offers your company $20,000,000 loan with an interest rate of 7%. The bank requires that you hold 4% of the borrowed amount in a non interest earning account at the bank. What is the effective annual interest rate?

Solution

Loan on which interest is applicable = 20000000×.96

= 19200000

Interest amount = $20,000,000* 7 %

= 1400000

Effective int rate = 1400000/19200000 * 100

= 7.29%