Problem:
In order to finance a shipment of badminton sets, Rujisawa Import-Export is seeking a $700,000 one-year bank loan. The Marine Bank requires that Rujisawa maintain a 25% compensating balance and requires four quarterly payments. The Lincoln Bank requires only a 15% compensating balance, but requires 12 monthly payments. In addition, Lincoln discounts the loan. Both banks state that their interest rate is 8%.
Required:
Question 1: Which bank has the lowest effective interest rate? (NOTE: deduct the compensating balances from the principal in determining the effective rate) Please explain
Question 2: If Lincoln Bank eliminated its compensating-balance requirement, would your answer change? Please explain.
Note: Explain in detail.