Gifts Galore Inc. borrowed $1.5 million from National City Bank (NCB). The loan was made for three months at a simple annual interest rate of 9 percent. A 20 percent compensating balance requirement raised the effective interest rate because the company does not maintain a checking balance at NCB.
a. The APR on the loan was 11.25 percent. What was the EAR?
b. What would the EAR of the loan be if the note required discount interest?