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Question: Zerox Copying Company plans to borrow $150,000. New Jersey National Bank will lend the money at one-half percentage point over the prime rate at the time of 8 1/2 percent (9 percent total) and requires a compensating balance of 20 percent. The principal in this case will be funds that the firm can effectively use in the business. This loan is for one year. What is the effective rate of interest? What would the effective rate be if Zerox were required to make four quarterly payments to retire the loan?

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