Cost of Bank Loans Del Hawley, owner of Hawleyâs Hardware, is negotiating with First City Bank for a 1-year loan of $50,000. First City has offered Hawley the following alternatives. Calculate the effective annual interest rate for each alternative. Which alternative has the lowest effective annual interest rate?
a. A 12% annual rate on a simple interest loan, with no compensating balance required and interest due at the end of the year.
b. A 9% annual rate on a simple interest loan, with a 20% compensating balance required and interest due at the end of the year.
c. An 8.75% annual rate on a discounted loan, with a 15% compensating balance.
d. Interest is figured as 8% of the $50,000 amount, payable at the end of the year, but the $50,000 is repayable in monthly installments during the year.
Cost of Bank Loans Del Hawley, owner of Hawleyâs Hardware, is negotiating with First City Bank for a 1-year loan of $50,000. First City has offered Hawley the following alternatives. Calculate the effective annual interest rate for each alternative. Which alternative has the lowest effective annual interest rate?
a. A 12% annual rate on a simple interest loan, with no compensating balance required and interest due at the end of the year.
b. A 9% annual rate on a simple interest loan, with a 20% compensating balance required and interest due at the end of the year.
c. An 8.75% annual rate on a discounted loan, with a 15% compensating balance.
d. Interest is figured as 8% of the $50,000 amount, payable at the end of the year, but the $50,000 is repayable in monthly installments during the year.
