Hayleys theatrial supply in the process of negotiating a line of credit with two

Question

Hayleys theatrial supply in the process of negotiating a line of credit with two local banks. the prime rate is currently 8 percent. the terms follow:

Bank loan terms

1st national 1 percent above prime rate on a discount basis and a 20 percent compensating balance on the face value of the loan.

2nd national 2 percent above prime rate ad a 15 percet comansating balance.

A. calculate the effective interest rate of both banks.

B Recommend which banks line of credit Hayleys Theatrical Supply should accept.

Explanation / Answer

let principal amount be P

net I = .09P+.09*.2P

r(efective interest rate) = .09+.09*.2 = 10.8%

for 2nd national

r = .1+.1*.15 = 11.5%

bank should accept bank 1

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