Rex London, an E-commerce service in London, England, plans to borrow £55,000 from the bank to pay for inventories for its online gift shop. The bank offers to lend the money at a 12 percent annual interest for the 6 months the funds will be needed.

a. Calculate the effective annual rate of interest on the loan.

b. In addition, the bank requires the firm to maintain a 17 percent compensating balance in the bank. Because the firm just opened for business, it does not have a demand deposit account at the bank that can be used to meet the compensating-balance requirement. This means that the firm will have to put up the 17 percent loan amount from its own funds (which was planned to be used to help finance the business) in a checking account. What is the cost of the loan now?

c. In addition to the compensating-balance requirement in part (b), you are told that interest will be discounted.

What is the effect annual rate of interest on the loan now?