Question

Cost of a short-term b during the spring have been the best in a decade, and Mr. Hale is expecting bank loan) Jimmy Hale is the owner and operator of the grain elevator in Brownfield, Texas, where he has lived for most of his 62 years. The rains a bumper wheat crop. This has prompted him to rethink his current financing sources. He ing with the close of the harvest season. After meeting with his bankor, Mr Hale is puzzling er quoted him a rate of 1 percent over prime (which is currently 8 percent) and also requested that the firm a over what the additional financing will actually cost The increase its current bank balance of $4,000 up to 20 percent of the loan a-lf interest and principal are all repaid at the end of the 3month loan term, what is the annual percentage rate on Hale accept this alternative? Note: Assume a 30-day month and 360-day year If the bank were to offer to lower the rate to prime if interest is disoounted, should Mr. - percentage rate onthe loan ofer made by Mr Hale's bank is (Round to two decimal places) this alternat els»% b. If the bank were to offer to lower the rate to prime if interest is discounted, the annual percentage rate of Rond to two decimal places Therefore Mr. Hale's should this alternative (Selectfromthe drop-down menu) ▼

Answer 1

	Loan amount			=	220000
	Compensating balance			=	20%*220000
				=	44000
	Actual amount receieved			=	loan amount-compensating balance
				=	220000-44000
				=	176000
	Interest rate			=	8%+1%=9%
	Interest for 3months			=	220000*9%*3/12
				=	4950
a)	rate for 3 months			=	interest/amount received
				=	4950/176000
				=	0.028125	or 2.8125%
	Annual rate			=	2.8125*12/3
				=	11.25%
b)	If interest is discounted,interest rate =8%
	Loan amount			=	220000
	Interest for 3 months @ 8%			=	220000*8%*3/12
				=	4400
	Compensating balance			=	44000
	Net amount received(interest is discounted)			=	loan amount-interest-compensating balance
				=	220000-4400-44000
				=	171600
	rate for 3 months			=	interest for 3months/amount received
				=	4400/171600
				=	0.025641	or 2.5641%
	annual rate			=	2.5641*12/3
				=	10.26%
	He should choose alternative (b)
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