Taggart Transcontinental needs a $100,000 loan for the next 1 year. Taggart is considering two loans with a one-year maturity and face value of $100,000:

• Loan 1 has an interest rate of 6.5% per annum and a 1.8% loan origination fee.
• Loan 2 has an interest rate of 7% per annum and a 4% compensation balance requirement (Note that the compensating balance is kept in a non-interest-bearing account with the bank as long as the loan remains outstanding).

Which of the following statements is MOST CORRECT?

a.

As the EAR of Loan 1 is 8.45% and the EAR of Loan 2 is 7.29%, Taggart Transcontinental should choose Loan 2.

b.

As the EAR of Loan 1 is 8.30% and the EAR of Loan 2 is 11.46%, Taggart Transcontinental should choose Loan 2.

c.

As the EAR of Loan 1 is 8.45% and the EAR of Loan 2 is 11.46%, Taggart Transcontinental should choose Loan 1.

d.

As the EAR of Loan 1 is 8.30% and the EAR of Loan 2 is 7.29%, Taggart Transcontinental should choose Loan 1.