Question

Your company is considering a 1-year loan and has received the following proposals:

1.         Bank A offers a discount interest term loan with a stated 6.9% interest rate compounded annually and a compensating balance of 7.1%. Payments are made monthly.

2.         Bank B offers a term loan at a stated interest rate of 7.2% compounded weekly. Payments are made weekly.

3.         Bank C offers a term loan at a stated interest rate of 7.0% compounded monthly and with a compensating balance of 6%. Payments are made monthly.

4.         Bank D offers a discount interest term loan at a stated interest rate of 6.95% compounded every 6 months. Payments are made monthly.

Required:

Explain which loan proposal you would recommend your company accept based on the effective cost only.

Answer 1

Above calculations are made for $1000 as loan amount

As per the above calculations it is proven that better to go with proposal 4 even though we are paying $1 extra when we took $1000 as loan because under this proposal bank is not imposing any Compensate Balance so we are eligible to use total amount which is available in our account. But in proposal 1 we are eligible to use only $929 but we need to pay interest on total amount which was given by bank