P16-13-Compensating balance versus discount loan Weathers Catering Supply, Inc. needs to borrow $150,000 for six months. State Bank has offered to lend the funds at a 9% annual rate subject to a 10% compensating balance. (Note; Weathers maintain $0 on deposit in State Bank) Frost Finance Co. has offered to lend the funds at 9% annual rate with discount-loan terms. The principal of both loans would be payable as maturity as a single sum.

a) Calculate the effective annual rate of interest on each loan.

b) What could Weathers do that would reduce the effective annual rate on the State Bank loan?