Compensating balance versus discount loan Weathers Catering Supply, Inc., needs to borrow $149,000 for 6 months. State Bank has offered to lend the funds at an annual rate of 8.9% subject to a 10.4%compensating balance. (Note: Weathers currently maintains $0 on deposit in State Bank.) Frost Finance Co. has offered to lend the funds at an annual rate of 8.9% with discount-loan terms. The principal of both loanswould 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?a. State Bank's semi-annual rate is%. (Round to two decimal places.)

Effective annual rate refers to the amount that is being charged on the borrowed amount after the…

Answered: Compensating balance versus discount…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 19P

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Del Hawley, owner of Hawleys Hardware, is negotiating with First City Bank for a 1-year loan of 50,000. First City has offered Hawley the alternatives listed here. Calculate the effective annual interest rate for each alternative. Which alternative has the lowest effective annual interest rate? a. A 12% annual rate on a simple interest loan, with no compensating balance required and interest due at the end of the year b. A 9% annual rate on a simple interest loan, with a 20% compensating balance required and interest due at the end of the year c. An 8.75% annual rate on a discounted loan, with a 15% compensating balance d. Interest figured as 8% of the 50,000 amount, payable at the end of the year, but with the loan amount repayable in monthly installments during the year
Weathers Catering Supply, Inc., needs to borrow $145,000 for 6months. State Bank has offered to lend the funds at an annual rate of 8.6% subject to a 10.4% compensating balance. (Note: Weathers currently maintains $0 on deposit in State Bank.) Frost Finance Co. has offered to lend the funds at an annual rate of 8.6% with discount-loan terms. The principal of both loans would be payable at maturity as a single sum. a. State Bank's semi-annual rate is ? (Round to two decimal places.) State Bank's effective annual rate is ? (Round to two decimal places.) Frost Finance's semi-annual rate is ? (Round to two decimal places.) Frost Finance's effective annual rate is ? (Round to two decimal places.)
Weathers Catering Supply, Inc., needs to borrow $149,000 for 6 months. State Bank has offered to lend the funds at an annual rate of 9.2% subject to a 10.5% compensating balance. (Note: Weathers currently maintains $0 on deposit in State Bank.) Frost Finance Co. has offered to lend the funds at an annual rate of 9.2% 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?
A company decides to obtain a small-business loan of $237,000. The financial institution from which the company borrows offers two options: a. Borrow $237,000 at 6% with monthly payments of $4,581.87 over 5 years. b. Borrow $237,000 at 7% with monthly payments of $2,751.77 over 10 years. Required: Record the issuance of an installment note payable under each option. Record the payments for the first and second month under each option. Determine the total amount of interest paid under each option over the full period of the note.
Jhar Industries has borrowed $125,000 under a line-of-credit agreement. While the company normally maintains a checking account balance of $15,000 in the lending bank, this credit line requires a 20% compensating balance. The stated interest rate on the borrowed funds is 10%. Show Solutions and Explanation. A. What is the effective annual rate of interest on the line of credit? (Format: 11.11%)
ABC Bank granted a loan to a client on January 1, 20x1. The interest on the loan is 10% payable annuallystarting December 31, 20x1. The loan matures in four years on December 31, 20x4. Pertinent information onthe loan is provided below: Principal amount 2,000,000Origination fee 154,430Direct origination cost 32,890Indirect origination cost 5,000After considering the origination fee received from the borrower and the direct origination cost incurred, theeffective interest rate on the loan is 12%.1. At what amount shall the loan be initially measured on January 1, 20x1?2. How much shall be reported as interest income for 20x1?3. What is the carrying amount of the loan on December 31, 20x1?
Jackson Industries has borrowed $125,000 under a line-of-credit agreement. While the company normally maintains a checking account balance of $15,000 in the lending bank, this credit line requires a 20% compensating balance. The stated interest rate on the borrowed funds is 10%. 1.What is the effective annual rate of interest on the line of credit? Format: 11.11%
(Cost of short-term bank loan) On July 1, 2018, the Southwest Forging Corporation arranged for a line of credit with the First National Bank (FNB) of Dallas. The terms of the agreement call for a $120,000 maximum loan with interest set at 1 percent over prime. In addition, the firm has to maintain a 19 percent compensating balance in its demand deposit account throughout the year. The prime rate is currently 11 percent. Note: Interest is not paid in advance (discounted). a. If Southwest normally maintains a $22,800 to $34,800 balance in its checking account with FNB of Dallas, what is the effective cost of credit under the line-of-credit agreement when the maximum loan amount is used for a full year? b. Compute the effective cost of credit if the firm borrows the compensating balance and the maximum possible amount under the loan agreement. Again, assume the full amount of the loan is outstanding for a whole year. C a. If Southwest normally maintains a $22,800 to $34,800 balance in its…
Discount Mart borrows $400,000 on November 1, 2020 with a 6-month loan that has an annual interest rate of 6% payable when the loan is due. What amounts related to this loan will Discount Mart report on its financial statements for the year ended December 31, 2020? Select one: a. Income statement: $4,000 interest expense; Balance sheet: $400,000 loan payable and $4,000 interest payable; Cash flow statement: $400,000 inflow b. Income statement: $4,000 interest expense; Balance sheet: $400,000 loan payable; Cash flow statement: $396,000 inflow c. Income statement: 0; Balance sheet: $400,000 loan payable $4,000; Cash flow statement: $400,000 net inflow d. Income statement: $4,000 interest expense; Balance sheet: $400,000 loan payable and $4,000 interest payable; Cash flow statement: $396,000 inflow
Cost of Bank Loans A). Del Hawley, owner of Hawley’s Hardware, is negotiating with First City Bank for a 1-year loan of $100,000. First City has offered Hawley the alternatives listed below. Calculate the effective annual interest rate for each alternative. Do not round intermediate calculations. Round your answers to two decimal places. A 8.75% annual rate on a discounted loan, with a 15% compensating balance. % Interest figured as 8% of the $100,000 amount, payable at the end of the year, but with the loan amount repayable in monthly installments during the year. % B). Gifts Galore Inc. borrowed $1.5 million from National City Bank. The loan was made at a simple annual interest rate of 9% a year for 3 months. A 15% compensating balance requirement raised the effective interest rate. Do not round intermediate calculations. Round your answers to two decimal places. The nominal annual rate on the loan was 11.25%. What is the true effective rate? %
Ezze Mattress needs to raise $200,000 for 6 months. The bank quotes a discount interest rate of 7.5% but does not require compensating balances. What is the effective annual interest rate on this loan? Multiple choice question. 7.50% 8.11% 7.84% 7.81%
NOP Co. has agreed to the following loan proposal by a bank:▪ Stated interest rate of 10% on a one-year discounted note ▪ 15% of the loan as compensating balance with zero-interest current account to be maintained with the bank. ▪ The loan will have net proceeds of P1,500,000. Required:1. How much is the principal amount of the loan?

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