50,000 is the extra the company must carry in its account per the terms of the loan. (100,000 is required less 50,000 it normally carries). Multiply this 50,000 by the 3% the company will earn in interest because this interest income reduces the interest expense it will pay on the loan.

Gosh, I hope that made sense. :)

Principal available = face amount of loan - compensatory balance

principal available = 500,000-100,000 = 400,000

But Principal available in this case is 450,000 because 50,000 is for transaction purposes which comes under available balance

Interest = 500,000 X 8% X 1 = 40,000

Interest earned on 50,000 is 50000X 0.3 = 1500

40000 - 1500 = 38,500

Effective interest rate =

Interest paid / Principal availbale = 38500 / 450000 = 8.55 %