Question

Consider two loans with​ one-year maturities and identical face​ values: a(n) 7.6 % loan with a...

Consider two loans with​ one-year maturities and identical face​ values: a(n) 7.6 % loan with a 0.96 % loan origination fee and​ a(n) 7.6 % loan with a 5.1 % ​(no-interest) compensating balance requirement. What is the effective annual rate ​(EAR​) associated with each​ loan? Which loan would have the highest EAR and​ why? The EAR in the first case is nothing​%. ​(Round to one decimal​ place.) The EAR in the second case is nothing​%. ​(Round to one decimal​ place.) Which loan would have the highest EAR and​ why? ​ (Select the best choice​ below.) A. Both loans will cost the same since a 0.96 % loan origination fee is equivalent to a 5.1 % ​(no-interest) compensating balance requirement. B. It cannot be determined since we do not have the face value of the loan. C. The loan with the origination fee would cost the most since the loan origination fee is just another form of interest. D. The loan with the compensating balance would cost the most since you do not get to use the entire amount.

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