loan
Question
Summit Record Company is negotiating with two banks for a $157,000 loan. Fidelity Bank requires a compensating
balance of 24 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 12 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 9 percent. Compensating balances will be subtracted from the $157,000 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.) |
| Effective Rate of Interest | |
| Fidelity Bank | % |
| Southwest Bank | % |
| a-2. | Which loan should Summit accept? |
| Southwest BankFidelity Bank |
| b. | Recompute the effective cost of interest, assuming that Summit ordinarily maintains $37,680 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.) |
| Effective Rate of Interest | |
| Fidelity Bank | % |
| Southwest Bank | % |
| c. | Does your choice of banks change if the assumption in part b is correct? |
| YesNo |
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