Suppose your firm is seeking a seven - year, amortizing $770,000 loan with annual payments, and your bank is offering you the choice between a loan of $817,000 with a compensating balance of $47,000 and a loan of $770,000 without a compensating balance. The interest rate on the $770,000 loan is 8.0 percent. How low would the interest rate on the loan with the compensating balance have to be for you to choose it?

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Effective Interest Rate

The term interest rate can be defined as the amount that is charged by the lender as a percentage on the principal amount. Interest rate which is charged annually is known as annual percentage rate.