Problem:
Mime Theatrical Supply is 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 discounted basis and a 20 percent compensating balance on the face value of the loan.
2nd National
2 percent above prime rate and a 15 percent compensating balance.
(a) Calculate the effective interest rate of both banks.
(b) Recommend which bank's line of credit Mime Theatrical Supply should accept.