Compensating balance versus discount loan Weathers Catering Supply, Inc., needs to borrow $145,000 for 6 months. Stat
Posted: Wed Apr 06, 2022 9:03 am
Compensating balance versus discount loan Weathers
Catering Supply, Inc., needs to
borrow $145,000 for 6 months. State Bank has
offered to lend the funds at an annual rate
of 8.8% subject to a 9.7% compensating
balance. (Note: Weathers currently maintains $0 on
deposit in State Bank.) Frost Finance Co. has offered to lend
the funds at an annual rate
of 8.8% with discount-loan terms. The principal of
both loans would be payable at maturity as a single sum.
a. Calculate the effective annual rate of interest on
each loan.
b. What could Weathers do that would reduce the effective
annual rate on the State Bank loan?
Catering Supply, Inc., needs to
borrow $145,000 for 6 months. State Bank has
offered to lend the funds at an annual rate
of 8.8% subject to a 9.7% compensating
balance. (Note: Weathers currently maintains $0 on
deposit in State Bank.) Frost Finance Co. has offered to lend
the funds at an annual rate
of 8.8% with discount-loan terms. The principal of
both loans would be payable at maturity as a single sum.
a. Calculate the effective annual rate of interest on
each loan.
b. What could Weathers do that would reduce the effective
annual rate on the State Bank loan?