Summit Record Company is negotiating with two banks for a $134, 000 loan. Fidelity Bank requires a compensating balance of 18 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 9 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 12 percent. Compensating balances will be subtracted from the $134,000 in determining the available funds in part a. a-1. Calculate the effective interest rate for Fidelity Bank and Southwest Bank. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. a-2. Which loan should Summit accept? multiple choice 1 Southwest Bank Correct Fidelity Bank b. Recompute the effective cost of interest, assuming that Summit ordinarily maintains $ 24, 120 at each bank in deposits that will serve as compensating balances. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. c. Does your choice of banks change if the assumption in part b is correct? multiple choice 2 Yes Correct No.

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
icon
Related questions
Question

Summit Record Company is negotiating with two banks for a $134, 000 loan. Fidelity Bank requires a compensating balance of 18 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 9 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 12 percent. Compensating balances will be subtracted from the $134,000 in determining the available funds in part a. a-1. Calculate the effective interest rate for Fidelity Bank and Southwest Bank. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. a-2. Which loan should Summit accept? multiple choice 1 Southwest Bank Correct Fidelity Bank b. Recompute the effective cost of interest, assuming that Summit ordinarily maintains $ 24, 120 at each bank in deposits that will serve as compensating balances. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. c. Does your choice of banks change if the assumption in part b is correct? multiple choice 2 Yes Correct No.

Expert Solution
steps

Step by step

Solved in 6 steps

Blurred answer
Knowledge Booster
Avoiding and Correcting Credit Mistakes
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.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
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…
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