Question: Problem 4(10 mks): Comet is negotiating with two banks for a $200,000 loan. Centric Bank requires a 25 percent compensating balance, discounts the loan, and

Problem 4(10 mks): Comet is negotiating with two banks for a $200,000 loan.

Centric Bank requires a 25 percent compensating balance, discounts the loan, and wants to be paid back in four quarterly payments.

Midwest Bank requires a 15 percent compensating balance and does not discount the loan, but it wants to be paid back in 12 monthly instalments.

The stated rate at both banks is 8 percent.

  1. (5 mks) Calculate the cost of each loan. Which loan should Comet accept?
  2. (5 mks) Recompute the annual cost of interest, assuming Comet ordinarily maintains $20,000 at each bank in deposits that will serve as compensating balances.

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