Cost of Bank Loans

Del Hawley, owner of Hawleys Hardware, is negotiating with First City Bank for a 1-year loan of $93,000. First City has offered Hawley the alternatives listed below. Calculate the effective annual interest rate for each alternative. Do not round intermediate calculations. Round your answers to two decimal places.

1. A 11% annual rate on a simple interest loan, with no compensating balance required and interest due at the end of the year.

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2. A 8% annual rate on a simple interest loan, with a 20% compensating balance required and interest due at the end of the year.

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3. A 8.5% annual rate on a discounted loan, with a 15% compensating balance.

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4. Interest figured as 7% of the $93,000 amount, payable at the end of the year, but with the loan amount repayable in monthly installments during the year.

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Which alternative has the lowest effective annual interest rate?

Cost of Bank Loans

Gifts Galore Inc. borrowed $1.5 million from National City Bank. The loan was made at a simple annual interest rate of 9% a year for 3 months. A 20% compensating balance requirement raised the effective interest rate. Do not round intermediate calculations. Round your answers to two decimal places.

1. The nominal annual rate on the loan was 11.25%. What is the true effective rate?

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2. What would be the effective cost of the loan if the note required discount interest?

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3. What would be the nominal annual interest rate on the loan if the bank did not require a compensating balance but required repayment in three equal monthly installments?

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