Question

P16-13 (similar to) Compensating balance versus discount loan Weathers Catering Supply, Inc., needs to borrow $154,000 for 6 months. State Bank has offered to lend the funds at an annual rate of 8.6% 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 8.6% 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? a. State Bank's semi-annual rate is 1%. (Round to two decimal places.) Enter your answer in the answer box and then click Check Answer. ? parts Clear All Check Answer remaining

Answer 1

Vidyalekhane DATE PAGE Last Etteetive annual rate for steete bank locen companseeting balance __39.7of $._154000 = $_14938 feind zesed 3 154000 – 149383_139062 Interest paid = 154000 x 8.6 % x 6 = 6622 12 il Effective rate of interest ..6622_ =4,76% 40% 6 months ___ 139062 Effective anneal rate é 47.6 x2 =19,52% Effective annecal rate or discount loan- Fund received: 154000 C1- int l ____2 154000 CI= 0.043) . -0.63). bo iz 14737-82 Interest paid = 154000 - 147378 2 6622, Effective zate for 6 months : 6622 24.49% ___147378 Effective annreal rate : 4.49x2 18.98 % 62. It weathors catering becomes regular cestomer of state Bank and keeps its regular deposits with state bank then there could not be seqzeisement of additioncel eleposit for compenseeting balance, hence cost ceill bennezeduced CamScanner