Penn Inc. needs to borrow $250,000 for the next 6 months. The company has a line of credit with a...

Question:

Penn Inc. needs to borrow $250,000 for the next 6 months. The company has a line of credit with a bank that allows the company to borrow funds with a 9% interest rate subject to a 20% of loan compensating balance. Currently, Penn Inc. has no funds on deposit with the bank and will need the loan to cover the compensating balance as well as their other financing needs. What will be the total interest amount for this financing?

a) $8,750

b) $11,250

c) $12,500

d) $10,000

Interest Expenses

Interest is the biggest expense in the bank and this will be paid from the interest income and this will be reported in the debit side of the income statement.

Answer and Explanation:

Total Interest Paid by the bank:

Interest rate = 10/2 = 5% per semi annual
T = 1
P = 250000
Total Interest paid to the bank= P (1 + r ) t - P
= 250000 (1+ 0.05) 1 ? 250000
= 250000 * 1.05 ? 250000
262500 - 250000
12500


Learn more about this topic:

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How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
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