Daniel has just opened a furniture shop in Tg Malim. He plans to borrow RM350,000.00 from MTB bank to pay for inventories for his furniture shop. MTB bank offers to lend him the money at 12 percent annual interest for the 9 months the funds will be needed. MTB bank requires him to maintain a 10 percent compensating balance in the bank. Because Daniel is just opening the business, he does not have a demand deposit account at the bank that can be used to meet the compensating-balance requirement. This means that Daniel will have to put up 10 percent of the loan amount from his own personal money (which he had planned to use to help finance the business) in a checking account. His wife, Fatima whose own another furniture shop in Rawang is considering getting a 9-months loan with a face value of RM280,000.00 to build a new warehouse for her furniture shop. Her current balance is RM15,000.00 at CCB bank that offered an unsecured loan for 13 percent. No additional compensation is required by CCB bank because the bank considers Fatima as a reliable customer. However, RM15,000.00 should be deposited by Fatima in the account. Fatima was offered a loan from another bank, HCB where she does not have any transactions or any account, at 12 percent and compensation balance of 15 percent of the loan. If she accepts the second offer, Fatima will need to transfer RM15,000.00 to the HCB bank, which costs her 1.5% of the total sum.

REQUIRED: Based on Daniel and his wife scenarios, answer the following questions. a. Compare the cost of the loan for Daniel if MTB bank require him to maintain a 10 percent compensating balance in the bank and vice versa. [7 marks]

b. On top of the compensating-balance requirement of 10%, Daniel was informed that interest will be discounted. Then, what is the effective annual rate of interest on the loan now? [3 marks]

c. Which offer should Fatima accept? Justify your answer with appropriate computations?

[10 marks]