Question: Tucker Drilling Corp. palns to borrow $200,000. Northern National Bank will lend the money at one-half percentage point over the prime rate of 8 1/2 percent (9 percent total) and requires a compensating balance of 20 percent. Principal in this case refers to funds that the firm can effectively use in the business.
What is the effective rate of interest? What would the effective rate be if Tucker Drilling were required to make four quarterly payments to retire the loan?