Dr. Ruth is going to borrow $5,500 to help write a book. The loan is for one year and the money can either be borrowed at the prime rate or the LIBOR rate. Assume the prime rate is 9 percent and LIBOR 1.0 percent less. Also assume there will be a $70 transaction fee with LIBOR (this amount must be added to the interest cost with LIBOR).
a. What is the effective interest rate on the LIBOR loan? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
b. Which loan has the lower effective interest cost? Prime or LIBOR.