Question
Consider two loans with one-year maturities and identical face values: a(n) 8.3 % loan with a 0.96 % loan origination fee and a(n) 8.3 %
Consider two loans with one-year maturities and identical face values: a(n) 8.3 % loan with a 0.96 % loan origination fee and a(n) 8.3 % loan with a 5.3 % (no-interest) compensating balance requirement. What is the effective annual rate (EAR) associated with each loan? Which loan would have the highest Eince the loan origination fee is just another form of interest. C. The loan with the compensating balance would cost the most since you do not get to use the entire amount. D. It cannot be determined since we do not have the face value of the loan.
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