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Gulf Stream Imports: effective rate of two financing options

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In order to finance a shipment of Mexican pottery, Gulf Stream Imports is seeking a $500,000 one year bank loan. The Mercantile Bank requires that Gulf Stream Imports maintain a 20% compensating balance and requires four quarterly payments. The marine bank requires only a 10% compensating balance but requires twelve monthly payments. In addition marine discounts the loan. Both banks interest rate is 9%

a) Find the effective rate of both. Which is lowest?

b) If Marine Bank eliminates its compenstating balance requirement, would the answer change? What would the new effective rate be?

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Solution Summary

The solution examines effective rate of two financing options.The solution examines if Marine Bank eliminates its compensating balance requirements would change the answer.

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