Question

Compensating balance versus discount loan   Weathers Catering​ Supply, Inc., needs to borrow

$ 151 comma 000$151,000

for

66

months. State Bank has offered to lend the funds at an annual rate of

9.4 %9.4%

subject to a

10.4 %10.4%

compensating balance.  

​(​Note:

Weathers currently maintains

$ 0$0

on deposit in State​ Bank.) Frost Finance Co. has offered to lend the funds at an annual rate of

9.4 %9.4%

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?

Answer 1

­SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE