Compensating balance versus discount loans. Weathers Catering Supply, Inc. needs to borrow $150,000 for 6 months. State Bank has offered to lend the funds at 9% annual rate subject to a 10% compensating balance. (Note: Weathers currently maintains $0 on deposit in State Bank). Forest Finance Co. has offered to lend the funds at a 9% annual rate with discount-loan terms. The principal of both loans would be payable at maturity as a single sum.

1. Calculate the effective annual rate of interest on each loan.
2. What could Weathers do that would reduce the effective annual rate on the State Bank loan?