Compensating balance. Tuckhoe Hospital wishes to establish a line of credit with a bank.

The first bank’s terms call for a $600,000 maximum loan with an interest rate of 3 percent and a $2,000 fee. The second bank, for the same line of credit, charges an interest rate of 4 percent but no fee. The compensating balance requirement is 5 percent of the total line of credit for either bank.

a. What would be the effective interest rate for Tuckhoe Hospital from the first bank if 50 percent of the total amount were used during the year?

b. What would be the effective interest rate for Tuckhoe Hospital from the first bank if 25 percent of the total amount were used during the year?

c. What would be the effective interest rate for Tuckhoe Hospital from the second bank if 50 percent of the total amount were used during the year?

d. What would be the effective interest rate for Tuckhoe Hospital from the second bank if 25 percent of the total amount were used during the year?

e. Which bank would be the better choice for Tuckhoe Hospital?