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Summit Record Company is negotiating with two banks for a $157,000 loan. Fidelity Bank requires a compensating balance of 24 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 12 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 8 percent. Compensating balances will be subtracted from the $157,000 in determining the available funds in part a.

Required:
a. Calculate the effective interest rate for Fidelity Bank and Southwest Bank.
b. Which loan should Summit accept?
c. Recompute the effective cost of interest, assuming that Summit ordinarily maintains $37,680 at each bank in deposits that will serve as compensating balances.

Respuesta :

ogorwyne

Explanation:

fidelity bank

2 x 4 quarterly x 8% of 157000/157000-(24% of 157000)- 8% x (4+1)

=2x4x12650 / 157000-37680 - 12560 x 5

= 100480/533800

= 0.1882

= 18.82%

southwest bank

2x12x12560 / 157000 - (12% 0f 157000) x 12+1

= 301440/1796080

=0.1678

= 16.78%

b. we will choose south west bank because its effective interest rate is smaller

c. fidelity bank

= 2x4x12560 /(157000-12560)x(4+1)

= 100480/722200

= 0.1391

= 13.91%

southwest bank

2x12x12560/157000x13

= 301440/2041000

= 0.1477

= 14.77%

if compensating balance are maintained in the course of business then we should pick fidelity oversouthwest bank

A. Interest rates for Fidelity and Southwest bank is= 18.82% and 16.78%

B. Its effective interest rate is smaller

C. The effective cost of interest is 14.77%

Computation of The Interest rates

A. When fidelity bank the effective interest rate is:

2 x 4 quarterly x 8% of 157000/157000-(24% of 157000)- 8% x (4+1)

Then =2x4x12650 / 157000-37680 - 12560 x 5

After that = 100480/533800

Now, = 0.1882

Therefore, = 18.82%

The effective interest rate of southwest bank are:

Then 2x12x12560 / 157000 - (12% 0f 157000) x 12+1

After that = 301440/1796080

Therefore, =0.1678

= 16.78%

B. Now we will choose southwest bank because its effective interest rate is smaller or lesser.

C. The effective cost of interest of fidelity bank is:

Then = 2x4x12560 /(157000-12560)x(4+1)

After that = 100480/722200

Then = 0.1391

Thus, = 13.91%

southwest bank

2x12x12560/157000x13

Now we put the value = 301440/2041000

Then = 0.1477

Therefore, = 14.77%

When compensating balance is maintained in the course of business then we should pick fidelity over southwest bank

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