Question: Consider two loans with a1-year maturity and identical facevalues: a(n) 7.5 % loan with a 1.04 % loan origination fee anda(n) 7.5 % loan with

Consider two loans with a1-year maturity and identical facevalues: a(n) 7.5 % loan with a 1.04 % loan origination fee anda(n) 7.5 % loan with a 5.3 % (no-interest) compensating balance requirement. Which loan would have the higher effective annual rate (EAR)? Why?

The EAR in the first case is ______%. (Round to one decimalplace.)

The EAR in the second case is _____%. (Round to one decimalplace.)

Which loan would have the higher EAR andwhy? (Select the best choicebelow.)

A. The loan with the compensating balance would cost the most since you do not get to use the entire amount.

B. The loan with the origination fee would cost the most since the loan origination fee is just another form of interest.

C. It cannot be determined since we do not have the face value of the loan.

D. Both loans will cost the same since a 1.04 % loan origination fee is equivalent to a 5.3 % (no-interest) compensating balance requirement.

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