Summit Record Company is negotiating with two banks for a $110,000 loan. Fidelity Bank requires a compensating balance of 20 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 10 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 8 percent. Compensating balances will be subtracted from the $110,000 in determining the available funds in part a. Required:
a. Calculate the effective interest rate for Fidelity Bank and Southwest Bank.
b. Which loan should Summit accept?
c. Recompute the effective cost of interest, assuming that Summit ordinarily maintains $22,000 at each bank in deposits that will serve as compensating balances.
d. Does your choice of banks change if the assumption in part b is correct?