Question: Dr. Ruth is going to borrow $5,800 to help write a book. The loan is for one year and the money can be borrowed at

Dr. Ruth is going to borrow $5,800 to help write a book. The loan is for one year and the money can be borrowed at either the prime rate or the LIBOR rate. Assume the prime rate is 9 percent and LIBOR 1.0 percent less. Also assume there will be a $55 transaction fee with LIBOR (this amount must be added to the interest cost with LIBOR).

a. What is the effective interest rate on the LIBOR loan? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

b. Which loan has the lower effective interest cost?

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