The Fair Meadows Motel borrowed funds of $30,000 from the Rocky Hills Bank for 1 year. The annual interest rate is 8%. The bank requires the motel to have a compensating balance of $5,000 in its checking account.

Required:

1. Determine the effective interest rate.

2. Assume the motel normally maintains $1,000 in its checking account, so only an additional $4,000 must be left in its account related to this loan. What is the effective interest rate?