Summit Record Company is negotiating with two banks for a $105,000 loan. Fidelity Bank requires a...

 

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Summit Record Company is negotiating with two banks for a $105,000 loan. Fidelity Bank requires a compensating balance of 20 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 10 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 12 percent Compensating balances will be subtracted from the $105,000 in determining the available funds in part a a-1. Calculate the effective interest rate for Fidelity Bank and Southwest Bank. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Fidelity Bank Southwest Bank Effective Rate of Interest a-2. Which loan should Summit accept? b. Recompute the effective cost of interest, assuming that Summit ordinarily maintains $21,000 at each bank in deposits that will serve as compensating balances. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Fidelity Bank Southwest Bank Effective Rate of Interest % c. Does your choice of banks change if the assumption in part b is correct? O Yes No Summit Record Company is negotiating with two banks for a $105,000 loan. Fidelity Bank requires a compensating balance of 20 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 10 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 12 percent Compensating balances will be subtracted from the $105,000 in determining the available funds in part a a-1. Calculate the effective interest rate for Fidelity Bank and Southwest Bank. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Fidelity Bank Southwest Bank Effective Rate of Interest a-2. Which loan should Summit accept? b. Recompute the effective cost of interest, assuming that Summit ordinarily maintains $21,000 at each bank in deposits that will serve as compensating balances. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Fidelity Bank Southwest Bank Effective Rate of Interest % c. Does your choice of banks change if the assumption in part b is correct? O Yes No

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Effective Interest Rate Calculation Fidelity Bank Compensating Balance 20 105000 21000 Available Fun... View the full answer