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P16-13-Compensating balance versus discount loan Weathers Catering Supply

P16-13-Compensating balance versus discount loan Weathers Catering Supply, Inc. needs to borrow $150,000 for six months. State Bank has offered to lend the funds at a 9% annual rate subject to a 10% compensating balance. (Note; Weathers maintain $0 on deposit in State Bank) Frost Finance Co. has offered to lend the funds at 9% annual rate with discount-loan terms. The principal of both loans would be payable as maturity as a single sum.

a) Calculate the effective annual rate of interest on each loan.

b) What could Weathers do that would reduce the effective annual rate on the State Bank loan?

Jan 31 2020 View more View Less

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