Question
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
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.
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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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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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A 8.5% annual rate on a discounted loan, with a 15% compensating balance.
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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.
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The nominal annual rate on the loan was 11.25%. What is the true effective rate?
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What would be the effective cost of the loan if the note required discount interest?
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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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