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Compensating balance versus discount loan Weathers Catering Supply, Inc. requires to borrow $150,000 for six months. State Bank has offered to lend the funds at the 9% annual rate subject to a 10% compensating balance. (Note; Weathers maintain $0 upon 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) Compute 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?

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  • Reference No.:- M91145476

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