Summit Record Company is negotiating with two banks for a $147,000 loan. Fidelity Bank requires a...

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Summit Record Company is negotiating with two banks for a$147,000 loan. Fidelity Bank requires a compensating balance of 30percent, discounts the loan, and wants to be paid back in fourquarterly payments. Southwest Bank requires a compensating balanceof 15 percent, does not discount the loan, but wants to be paidback in 12 monthly installments. The stated rate for both banks is8 percent. Compensating balances will be subtracted from the$147,000 in determining the available funds in part a.

a-1. Calculate the effective interest rate forFidelity Bank and Southwest Bank. (Do not roundintermediate calculations. Input your answers as a percent roundedto 2 decimal places.)



a-2. Which loan should Summit accept?

Southwest Bank
Fidelity Bank

b. Recompute the effective cost of interest,assuming that Summit ordinarily maintains $44,100 at each bank indeposits that will serve as compensating balances. (Do notround intermediate calculations. Input your answers as a percentrounded to 2 decimal places.)



c. Does your choice of banks change if theassumption in part b is correct?

Yes
No

Answer & Explanation Solved by verified expert

3.7 Ratings (497 Votes)

a1 Calculation of effective interest rate for Fidelity bank Calculation of interest expense Interest expense Interest rateLoan amount Interest expense 008147000 Interest expense 11760 Compensation balance CPrincipal Compensation balance 030147000 Compensation balance 44100 Effective rate of interest 2Number of payments per yearInterest amount per periodNumber See Answer

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Summit Record Company is negotiating with two banks for a$147,000 loan. Fidelity Bank requires a compensating balance of 30percent, discounts the loan, and wants to be paid back in fourquarterly payments. Southwest Bank requires a compensating balanceof 15 percent, does not discount the loan, but wants to be paidback in 12 monthly installments. The stated rate for both banks is8 percent. Compensating balances will be subtracted from the$147,000 in determining the available funds in part a. a-1. Calculate the effective interest rate forFidelity Bank and Southwest Bank. (Do not roundintermediate calculations. Input your answers as a percent roundedto 2 decimal places.) a-2. Which loan should Summit accept? Southwest BankFidelity Bankb. Recompute the effective cost of interest,assuming that Summit ordinarily maintains $44,100 at each bank indeposits that will serve as compensating balances. (Do notround intermediate calculations. Input your answers as a percentrounded to 2 decimal places.) c. Does your choice of banks change if theassumption in part b is correct? YesNo