Suppose your firm is seeking a four-year, amortizing $200,000 loan with annual payments and your bank is offering you the choice between a $205,000 loan with a $5,000 compensating balance and a $200,000 loan without a compensating balance. If the interest rate on the $200,000 loan is 9.8 percent, how low would the interest rate on the loan with the compensating balance have to be in order for you to choose it?
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