Find effective interest rate for fidelity and southwest bank

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Reference no: EM13333216

Summit Record Company is negotiating with two banks for a $136,000 loan. Fidelity Bank requires a 14 percent compensating balance, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a 7 percent compensating balance, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 10 percent.

1. Calculate the effective interest rate for Fidelity Bank and Southwest Bank.

2. Which loan should Summit accept?

3. Recompute the effective cost of interest, assuming that Summit ordinarily maintains $19,040 at each bank in deposits that will serve as compensating balances.

Reference no: EM13333216

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