Question details

Assignment Loan Scenarios
$ 15.00

Midland Chemical Co. is negotiating a loan from Manhattan Bank and Trust. The

small chemical company needs to borrow $500,000.


The bank offers a rate of 8¼ percent with a 20 percent compensating balance

requirement, or as an alternative, 9¾ percent with additional fees of $5,500 to cover

services the bank is providing. In either case the rate on the loan is floating (changes as

the prime interest rate changes), and the loan would be for one year.


a. Which loan carries the lower effective rate? Consider fees to be the equivalent of

other interest.


b. If the loan with a 20 percent compensating balance requirement were to be paid

off in 12 monthly payments, what would the effective rate be? (Principal equals

amount borrowed minus the compensating balance.)


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