You are the financial manager of Pipeline Pharmaceuticals.You need to raise nearly $450,000 to finance your working capital need for 3 months.You have two options.The first option is that your firm can issue a commercial paper with a face value of $450,000.The commercial paper will mature in 3 months.The net proceed from the sale of the paper will be $440,000.

The second option is to take out a $500,000 loan from Prime Time Bank for 3 months.The APR on the loan will be 10%. One condition of the loan is that Pipeline will have to maintain a compensating balance account with prime Time bank for 3 months.The compensating balance will have to be 10% of the loan principal.The compensating balance account will not pay any interest.As a prudent manager, you will use the cheaper of the two options.Which option will you choose?

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