Susan Visscher, owner of Visscher’s Hardware, is negotiating with First Merchant’s Bank for a $50,000, one-year loan. First Merchant’s has offered Visscher the following alternatives. Calculate the effective interest rate (r_EAR) for each alternative. Visscher does not have a checking account at Merchant’s Bank. Which alternative has the lowest r_EAR?
a. A 12 percent annual rate on a simple interest loan with no compensating balance required and interest due at the end of the year.
b. A 9 percent annual rate on a simple interest loan with a 20 percent compensating balance required and interest again due at the end of the year.
c. An 8.75 percent annual rate on a discounted loan with a 15 percent compensating balance.
d. Interest is figured as 8 percent of the $50,000 amount, payable at the end of the year, but the $50,000 is repayable in monthly installments during the year.