73. On January 1, 2010, Lynn Company borrows $2,000,000 from National Bank at 11% annual interest. In addition, Lynn is required to keep a compensatory balance of $200,000 on deposit at National Bank which will earn interest at 5%. The effective interest that Lynn pays on its $2,000,000 loan is
a.  10.0%.
b.  11.0%.
c.  11.5%.
d.  11.6%.
Solution
Interest paid on $1.8 million = $198,000
Interest paid on $200,000 savings = $12,000 [$200,000×(11%-5%)]
Total interest paid = $210,000
Net funds received for utilisation = $1.8 million
Effective interest rate = 11.6% [$210,000÷$1,800,000]
Correct option is (d)
.
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73- On January 1- 2010- Lynn Company borrows $2-000-000 from National.docx
1. 73. On January 1, 2010, Lynn Company borrows $2,000,000 from National Bank at 11% annual
interest. In addition, Lynn is required to keep a compensatory balance of $200,000 on deposit at
National Bank which will earn interest at 5%. The effective interest that Lynn pays on its
$2,000,000 loan is
a.  10.0%.
b.  11.0%.
c.  11.5%.
d.  11.6%.
Solution
Interest paid on $1.8 million = $198,000
Interest paid on $200,000 savings = $12,000 [$200,000×(11%-5%)]
Total interest paid = $210,000
Net funds received for utilisation = $1.8 million
Effective interest rate = 11.6% [$210,000÷$1,800,000]
Correct option is (d)
![73. On January 1, 2010, Lynn Company borrows $2,000,000 from National Bank at 11% annual
interest. In addition, Lynn is required to keep a compensatory balance of $200,000 on deposit at
National Bank which will earn interest at 5%. The effective interest that Lynn pays on its
$2,000,000 loan is
a.  10.0%.
b.  11.0%.
c.  11.5%.
d.  11.6%.
Solution
Interest paid on $1.8 million = $198,000
Interest paid on $200,000 savings = $12,000 [$200,000×(11%-5%)]
Total interest paid = $210,000
Net funds received for utilisation = $1.8 million
Effective interest rate = 11.6% [$210,000÷$1,800,000]
Correct option is (d)](https://image.slidesharecdn.com/73-onjanuary1-2010-lynncompanyborrows2-000-000fromnational-230127024326-85eede41/85/73-On-January-1-2010-Lynn-Company-borrows-2-000-000-from-National-docx-1-320.jpg)
