19.6 Bank A: The interest paid on the $20 million loan over the 6-month period will be $20 mil- lion x .07/2 = $.7 million. With a 20% compensating balance, $16 million is available to the firm. The effective annual interest rate is Effective annual rate on a loan with compensating balances =(1+ = (1 + actual interest paid borrowed funds available $.7 million -1.0894, or 8.94% $16 million Bank B: The compound annual interest rate on the simple loan is Effective annual rate = =(1+ quoted interest rate + -1 m .08 + 2 Bank C: The compound annual interest rate is Effective annual rate on a discount loan -1=1.042-1.0816, or 8.16% annual interest rate -1 1 .075 2 2 wn -1- .9625 -1 .0794, or 7.94%