Summit Record Company is negotiating with two banks for a $118,000 loan. Fidelity Bank requires a compensating balance of 16 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 8 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 9 percent. Compensating balances will be subtracted from the $118,000 in determining the available funds in part a.

a-1.	Calculate the effective interest rate for Fidelity Bank and Southwest Bank. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

	Effective Rate of Interest
Fidelity Bank	%
Southwest Bank	%

a-2.

Which loan should Summit accept?

	Southwest Bank
	Fidelity Bank

b.	Recompute the effective cost of interest, assuming that Summit ordinarily maintains $18,880 at each bank in deposits that will serve as compensating balances. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

	Effective Rate of Interest
Fidelity Bank	%
Southwest Bank	%

c.

Does your choice of banks change if the assumption in part b is correct?

	Yes
	No