Compensating balances and effective annual rates Lincoln Industries has a line of credit at Bank Two that requires it to pay $12\%$ interest on its borrowing and to maintain a compensating balance equal to $10\%$ of the amount

borrowed. The firm has borrowed $$680,000$ during the year under the agreement. Calculate the effective annual rate on the firm's borrowing in each of the following circumstances:

a$.$ The firm normally maintains no deposit balance at Bank Two.

b$.$ The firm normally maintains $$60,000$ in deposit balance at Bank Two.

c$.$ The firm normally maintains $$160,000$ deposit balance at Bank Two.

d$.$ Compare, contrast, and discuss your findings in parts $a,b,$ and $c.$

a$.$ If the firm normally maintains no deposit balance at the bank, the effective annual rate of interest is

$|\%.($Round to two decimal places.$)$

b$.$ If the firm normally maintains $$60,000$ in deposit balances at the bank, the effective annual rate of interest is

$\%.($Round to two decimal places.$)$

c$.$ If the firm normally maintains $$160,000$ in deposit balances at the bank, the effective annual rate of interest is

$\%.($Round to two decimal places.$)$

d$.$ Compare, contrast, and discuss your findings in parts $a,b,$ and $c.($Select the best answer below.$)$

A$.$ The effective annual rate of interest is the same for parts $a,b,$ and $c$ with a rate of $12\%.$

B$.$ The lowest effective interest rate occurs in part $b,$ when Lincoln has $$60,000$ on deposit. In parts a and $c,$ the need to use a portion of the loan proceeds for compensating balances raises the borrowing cost.

C$.$ The lowest effective interest rate occurs in part $c,$ when Lincoln has $$160,000$ on deposit. In parts a and $b,$ the need to use a portion of the loan proceeds for compensating balances raises the borrowing cost.

D$.$ The lowest effective interest rate occurs in part a$,$ when Lincoln has has no deposit balance. In parts $b$ and $c,$ the need to use a portion of the loan proceeds for compensating balances raises the borrowing cost.