TRAVEL Inc. can borrow $30K for three months from a bank at an APR (Annual Percentage Rate) of 10.2%. The loan has a loan origination fee of 2.5% on the principal of the loan; paid upfront. The bank also requires TRAVEL to keep 5% of the loan’s principal in a compensating balance account as long as the loan is outstanding. The bank pays interest of 0.65% APR with quarterly compounding on the compensating balance account. Calculate the effective annual rate (EAR) of this loan.
b. DOM Inc. can purchase goods from its supplier on terms of 1.5/20, net 45. i. Calculate the effective annual cost (EAR) of the trade credit. ii. DOM can borrow from the bank with monthly compounding APR at 24%. Would DOM utilise the loan or the trade credit?