Compensating balance versus discount loan Weathers Catering Supply, Inc., needs to borrow $ 145,000 for 6 months. State Bank has offered to lend the funds at an annual rate of 9.1 % subject to a 9.9 % compensating balance.(Note: Weathers currently maintains $ 0 on deposit in State Bank.) Frost Finance Co. has offered to lend the funds at an annual rate of 9.1 % with discount-loan terms. The principal of both loans would be payable at maturity as a single sum.

a.Calculate the effective annual rate of interest on each loan.

b.What could Weathers do that would reduce the effective annual rate on the State Bank loan?