Summit Record Company is negotiating with two banks for a $100,000 loan. Competing terms Fidelity Bank requires a 20 percent compensating balance, discounts the loan, from banks and wants to be paid back in four quarterly payments. Southwest Bank requires a 10 percent compensating balance, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 9 percent.

Compensating balances will be subtracted from the $100,000 in determining the available funds in part a.

a. Which loan should Summit accept?

b. Recompute the effective cost of interest, assuming that Summit ordinarily maintains at each bank $20,000 in deposits that will serve as compensating balances.

c. Does your choice of banks change if the assumption in part b is correct?