Certified Internal Auditor (CIA) Part 3: Business Knowledge for Internal Auditing — Question 151

An organization needs to borrow a large amount of cash to fund its expansion plan. Which of the following annual interest rates is least expensive?

Answer options

• A. 7 percent simple interest with a 10 percent compensating balance.
• B. 7 percent simple interest paid at the end of each year.
• C. 7 percent discount interest.
• D. 7 percent compounding interest.

Correct answer: B

Explanation

Option B is the least expensive option because it involves straightforward simple interest paid at the end of each year without any additional conditions. In contrast, option A has a compensating balance which requires maintaining a portion of the loan in reserve, making it more costly, while options C and D involve discount and compounding interest, respectively, which can increase the total amount paid over time.