Summit Record Company is negotiating with two banks for a $127,000 loan. Fidelity Bank requires a compensating balance of 22 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 11 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 7 percent. Compensating balances will be subtracted from the $127,000 in determining the available funds in part a a-1. Calculate the effective interest rate for Fidelity Bank and Southwest Bank. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Effective Rate of Interest Fidelity Bank Southwest Bank a-2. Which loan should Summit accept? O Southwest Bank O Fidelity Bank b. Recompute the effective cost of interest, assuming that Summit ordinarily maintains $27,940 at each bank in deposits that will serve as compensating balances. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Effective Rate of Interest Fidelity Bank Southwest Bank
Summit Record Company is negotiating with two banks for a $127,000 loan. Fidelity Bank requires a compensating balance of 22 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 11 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 7 percent. Compensating balances will be subtracted from the $127,000 in determining the available funds in part a a-1. Calculate the effective interest rate for Fidelity Bank and Southwest Bank. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Effective Rate of Interest Fidelity Bank Southwest Bank a-2. Which loan should Summit accept? O Southwest Bank O Fidelity Bank b. Recompute the effective cost of interest, assuming that Summit ordinarily maintains $27,940 at each bank in deposits that will serve as compensating balances. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Effective Rate of Interest Fidelity Bank Southwest Bank
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
13
Transcribed Image Text:Summit Record Company is negotiating with two banks for a
$127,000 loan. Fidelity Bank requires a compensating balance of
22 percent, discounts the loan, and wants to be paid back in four
quarterly payments. Southwest Bank requires a compensating
balance of 11 percent, does not discount the loan, but wants to be
paid back in 12 monthly installments. The stated rate for both
banks is 7 percent. Compensating balances will be subtracted
from the $127,000 in determining the available funds in part a.
a-1. Calculate the effective interest rate for Fidelity Bank and
Southwest Bank. (Do not round intermediate calculations. Input
your answers as a percent rounded to 2 decimal places.)
Effective Rate of
Interest
Fidelity Bank
Southwest Bank
a-2. Which loan should Summit accept?
O Southwest Bank
O Fidelity Bank
b. Recompute the effective cost of interest, assuming that Summit
ordinarily maintains $27,940 at each bank in deposits that will
serve as compensating balances. (Do not round intermediate
calculations. Input your answers as a percent rounded to 2
decimal places.)
Effective Rate of
Fidelity Bank
Southwest Bank
c. Does your choice of banks change if the assumption in part bis
correct?
O Yes
O No
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Given:
VIEWa: Calculation of Effective Interest Rate of Fidelity Bank:
VIEWCalculation of Effective Interest Rate of Southwest Bank:
VIEWb.Calculation of Effective Interest Rate of Fidelity Bank if Compensating Balance deposited in Bank:
VIEWCalculation of Effective Interest Rate of Southwest Bank if Compensating Balance deposited in Bank:
VIEWAnswers:
VIEW
Trending now
This is a popular solution!
Step by step
Solved in 6 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education