Calculate the effective annual rate of interest on each loan

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Reference no: EM131012101

Compensating balance versus discount loans. Weathers Catering Supply, Inc. needs to borrow $150,000 for 6 months. State Bank has offered to lend the funds at 9% annual rate subject to a 10% compensating balance. (Note: Weathers currently maintains $0 on deposit in State Bank). Forest Finance Co. has offered to lend the funds at a 9% annual rate with discount-loan terms. The principal of both loans would be payable at maturity as a single sum.

a. Calculate the effective annual rate of interest on each loan.

b. What could Weathers do that would reduce the effective annual rate on the State Bank loan?

Reference no: EM131012101

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