Jenny have open a furniture shop at Boston. She plans to borrow $350,000.00 from SS bank to pay for inventories for his furniture shop. SS bank offers to lend him the money at 12% annual interest for the 9 months the funds will be needed. SS bank requires her to maintain a 10% compensating balance in the bank. Because Nina is just opening the business, she does not have a demand deposit account at the bank that can be used to meet the compensating-balance requirement. This means that Nina will have to put up 10% of the loan amount from his own personal money (which he had planned to use to help finance the business) in a checking account.

Her husband, John whose own another furniture shop in Cambridge is considering getting a 9-months loan with a face value of $280,000.00 to build a new warehouse for his furniture shop. His current balance is &15,000.00 at ZZ bank that offered an unsecured loan for 13%. No additional compensation is required by ZZ bank because the bank considers John as a reliable customer. However, $15,000.00 should be deposited by John in the account.

John was offered a loan from another bank, KK bank where he does not have any transactions or any account, at 12% and a compensation balance of 15% of the loan. If he accepts the second offer, John will need to transfer $15,000.00 to the KK bank, which costs her 1.5% of the total sum.

Based on Jenny and her husband scenarios, answer the following questions.

i) Compare the cost of the loan for Jenny if SS bank require her to maintain a 10% compensating balance in the bank and vice versa.

ii) On top of the compensating-balance requirement of 10%, Jenny was informed that interest will be discounted. Then, what is the effective annual rate of interest on the loan now?

iii) Which offer should John accept? Justify your answer with appropriate computations?