Chapter 22, Problem 3P

Del Hawley, owner of Hawley’s Hardware, is negotiating with First City Bank for a 1-year loan of $50,000. First City has offered Hawley the alternatives listed here. Calculate the effective annual interest rate for each alternative. Which alternative has the lowest effective annual interest rate?

1. a. A 12% annual rate on a simple interest loan, with no compensating balance required and interest due at the end of the year
2. b. A 9% annual rate on a simple interest loan, with a 20% compensating balance required and interest due at the end of the year
3. c. An 8.75% annual rate on a discounted loan, with a 15% compensating balance
4. d. Interest figured as 8% of the $50,000 amount, payable at the end of the year, but with the loan amount repayable in monthly installments during the year