Business, 19.02.2020 22:34 sadsociety41

Summit Record Company is negotiating with two banks for a $122,000 loan. Fidelity Bank requires a compensating balance of 20 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 10 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 9 percent. Compensating balances will be subtracted from the $122,000 in determining the available funds in part a.

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.)

Effective Rate of Interest
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 $24,400 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.)

Effective Rate of Interest
Fidelity Bank %
Southwest Bank %

c. Does your choice of banks change if the assumption in part b is correct?
Yes
No

Answers: 1

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Summit Record Company is negotiating with two banks for a $122,000 loan. Fidelity Bank requires a co...