Question

Summit Record Company is negotiating with two banks for a $110,000 loan. Fidelity Bank requires a compensating balance of 20 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 10 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 8 percent. Compensating balances will be subtracted from the $110,000 in determining the available funds in part a.
  
a-1. Calculate the effective interest rate for Fidelity Bank and Southwest Bank. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
  

  
a-2. Which loan should Summit accept?
  

• Southwest Bank

• Fidelity Bank

b. Recompute the effective cost of interest, assuming that Summit ordinarily maintains $22,000 at each bank in deposits that will serve as compensating balances. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
  

  
c. Does your choice of banks change if the assumption in part b is correct?
  

• Yes

• No

Answer 1