Suppose your firm is seeking a three year amortizing 400000

Suppose your firm is seeking a three year, amortizing $400,000 loan with annual payments and your bank is offering you the choice between a $415,000 loan with a $15,000 compensating balance and a $400,000 loan without a compensating balance. The interest rate on the $400,000 loan is 9.5 percent. How low would the interest rate on the loan with the compensating balance have to be for you to choose it? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Solution

let us the find yearly payment for normal loan. use pmt formuale

=pmt(rate,nper,pv,fv,type)

=PMT(9.5%,3,400000,0,0)

=159431.99

use this as pmt and pv=415000 find the interest rate. use rate formuale

=rate(nper,pmt,pv,fv,type)

=rate(3,159431.99,415000,0,0)

=33.27%

the interest rate should be lower than 33.27%