Which of the followingone-year $1,000 bank loans offers the lowest effective annualrate?

a. A loan with an APR of 5.8%, compounded monthly.

b. A loan with an APR of 5.8%, compoundedannually, that also has a compensating balance requirement of 9.9% (on which no interest ispaid).

c. A loan with an APR of 5.8%, compoundedannually, that has a 1.4% loan origination fee.

a. A loan with an APR of 5.8%, compounded monthly.

Since the APR is 5.8%, the monthly rate is ________

This translates to an effective annual rate of _______

.

b. A loan with an APR of 5.8%, compoundedannually, that also has a compensating balance requirement of 9.8% (on which no interest ispaid).(Select from thedrop-down menus.)

The compensating balance is ________. Therefore, the borrower will have use of only _______of the $1,000.

The interest is ______. The interest rate per period is 7.1%. Since this alternative assumes annualcompounding, the effective annual rate is ________

as well.

c. A loan with an APR of 5.8%, compoundedannually, that has a 1.4% loan origination fee.(Select from thedrop-down menus.)

The interest expense is _______, and the loan origination fee is $14. The loan origination fee reduces the usable proceeds of the loan to ________

because it is paid at the beginning of the loan. The interest rate per period is ______

. Since the loan is compounded annually in thiscase, 7.9% is the effective annual rate.

(Select from thedrop-down menu.)

Thus, alternative _______ offers the lowest effective annual cost.