Finance
Summit Record Company is negotiating with two banks for a $136,000 loan. Fidelity Bank requires a 14 percent compensating balance, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a 7 percent compensating balance, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 10 percent.
(a-1)
Calculate the effective interest rate for Fidelity Bank and Southwest Bank. (Round your answers to 2 decimal places. Omit the "%" sign in your response.)
Effective rate
Fidelity Bank %
Southwest Bank %
(a-2) Which loan should Summit accept?
Southwest Bank
Fidelity Bank
(b)
Recompute the effective cost of interest, assuming that Summit ordinarily maintains $19,040 at each bank in deposits that will serve as compensating balances. (Round your answers to 2 decimal places. Omit the "%" sign in your response.)
Effective rate
Fidelity Bank %
Southwest Bank %
(c) Does your choice of banks change if the assumption in part b is correct?
Yes
No
Summit Record Company is negotiating with two banks for a $136,000 loan. Fidelity Bank requires a 14 percent compensating balance, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a 7 percent compensating balance, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 10 percent.
(a-1)
Calculate the effective interest rate for Fidelity Bank and Southwest Bank. (Round your answers to 2 decimal places. Omit the "%" sign in your response.)
Effective rate
Fidelity Bank %
Southwest Bank %
(a-2) Which loan should Summit accept?
Southwest Bank
Fidelity Bank
(b)
Recompute the effective cost of interest, assuming that Summit ordinarily maintains $19,040 at each bank in deposits that will serve as compensating balances. (Round your answers to 2 decimal places. Omit the "%" sign in your response.)
Effective rate
Fidelity Bank %
Southwest Bank %
(c) Does your choice of banks change if the assumption in part b is correct?
Yes
No
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