Calculate the effective annual interest rate

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Reference no: EM131368002

Del Hawley, owner of Hawley's Hardware, is negotiating with First City Bank for a 1-year loan of $50,000. First City has offered Hawley the following alternatives. Calculate the effective annual interest rate for each alternative. Which alternative has the lowest effective annual interest rate?

a. A 12 percent annual rate on a simple interest loan, with no compensating balance required and interest due at the end of the year.

b. A 9 percent annual rate on a simple interest loan, with a 20 percent compensating balance required and interest due at the end of the year.

c. An 8.75 percent annual rate on a discounted loan, with a 15 percent compensating balance.

d. Interest is figured as 8 percent of the $50,000 amount, payable at the end of the year, but the $50,000 is repayable in monthly installments during the year.

Reference no: EM131368002

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