Mime Theatrical Supply is in the process of negotiating a line of credit with two local banks. The prime rate is currently 8 percent. The terms follow:
Bank Loan Terms
1 percent above prime rate on a discounted basis and a 20 percent compensating balance on the face value of the loan.
2 percent above prime rate and a 15 percent compensating balance.
(a) Calculate the effective interest rate of both banks.
(b) Recommend which bank's line of credit Mime Theatrical Supply should accept.
We assume that the amount to be borrowed is $10,000
1st National Bank
The interest rate would be 9% (1% above prime). The interest amount for 1 year will be 10,000X9%=900. In a discounted loan, the interest is deducted upfront. A ...
The solution explains how to calculate the effective interest rate and decide among the alternatives