Automotive Accessories needs to borrow $135,000 for 6 months for renovations. It is considering two financing options: Bank Helping Hand offers an 8% annual rate subject to a 10% compensating balance. Bank Friendly Financer offers the funds as a discount loan with an annual rate of 8%. Automotive Accessories maintains no deposit balances in either bank, and repayment will be a single lump sum at maturity. a.What is the effective annual rate of interest on each loan? b.What can Automotive Accessories do to reduce the interest rates on these loans?

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Automotive Accessories needs to borrow $135,000 for 6 months for renovations. It is considering two financing options: Bank Helping Hand offers an 8% annual rate subject to a 10% compensating balance. Bank Friendly Financer offers the funds as a discount loan with an annual rate of 8%. Automotive Accessories maintains no deposit balances in either bank, and repayment will be a single lump sum at maturity.


a.What is the effective annual rate of interest on each loan?

b.What can Automotive Accessories do to reduce the interest rates on these loans?

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