Jimmy Hale is the owner and operator of the grain elevator in Brownfield, Texas, where he has lived for most of his 62 years. The rains during the spring have been the best in a decade and Mr. Hale is expecting a bumper wheat crop. This prompted Mr. Hale to rethink his current financing sources. He now believes he will need an additional $240,000 for the three-month period ending with the close of the harvest season. After meeting with his banker, Mr. Hale is puzzling over what the additional financing will actually cost. The banker quoted him a rate of 1 percent over prime (which is currently 7 percent) and also requested that the firm increase its current bank balance of $4,000 up to 20 percent of the loan.
a. If interest and principal are all repaid at the end of the three-month loan term, what is the annual percentage rate on the loan offer made by Mr. Hale’s bank?
b. If the bank were to offer to lower the rate to prime if interest is discounted, should Mr. Hale accept this alternative?