Question - In order to finance a shipment of badminton sets, Rujisawa Import-Export is seeking a $500,000 one-year bank loan. The Marine Bank requires that Rujisawa maintain a 20% compensating balance and requires four quarterly payments. The Lincoln Bank requires only a 10% compensating balance, but requires 12 monthly payments. In addition, Lincoln discounts the loan. Both banks state that their interest rate is 9%.
a) Which bank has the lowest effective interest rate?
b) If Lincoln Bank eliminated its compensating-balance requirement, would your answer change?