Question

Summit Record Company is negotiating with two banks for a $139,000 loan. Fidelity Bank requires a compensating balance of 14 percent, discounts the loan, and wants to be paid b four quarterly payments. Southwest Bank requires a compensating balance of 7 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated 12 percent. Compensating balances will be subtracted from the $139,000 in determining the available funds in part a. both banks 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.) Eff ttective Rate Interest Fidelity Bank Southwest Bank a-2. Which loan should Summit accept? O Southwest Bank O Fidelity Bank b. Recompute the effective cost of interest, assuming that Summit ordinarily maintains $19,460 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.) Eff of Interest Fidelity Bank % Southwest Bank c. Does your choice of banks change if the assumption in part b is correct? O Yes O No

Answer 1

bThe compenating falance urument oth ams dapoviks cash wi de met ycunsent Fideliy Ban (2x4x16680 ) Cu1)C13900o IGG80) e Ra: 133440 100 2 1.8Y Seuthwest Ban CRS / (12.41 (199000) 2x12x IG1680) 400320 1803000 22.15. Summit ict Fidelity shadd due las Hah q gnlerast Bams

a 1 Fidelity Bamle Primci pal cb x139 O00 4nterest 4ntres o1ate 12 $161G80f C xPimcipal Compensatung balame 14 139oco 30 $19,460 Effective 1ate gntrest (2 Armual no paymenta Sntoest no.op Payment41)xPuncipal S139000-16680 - 19460) 2x4x 1G1680) 13 3440 e100 514300 25.94% Euthwest Bamk 4nt Int srate x Pruncypa 12 x$139006 16/680/- Compensatuny bal 7 X139000 (2 x 12 x 1G1680)/ [c24) (129000 -9730) 400320 X 100 IG8010 2 3.82/ Summit heuld Select Southwest Bamh due to lao Iikrast Srat