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The small chemical companys amount to be borrowed is $650,000 The…

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The small chemical company's amount...
The small chemical company's amount to be borrowed is: $650,000
The bank offers a rate of 8 percent with a 20 percent compensating balance
requirement, or as an alternative, 11 percent with additional fees of $5,500 to cover
services the bank is providing. In either case the rate on the loan is floating (changes as the prime interest rate changes), and the loan would be for one year.

Calculate effective rates on each loan scenario:
Scenario 1: The bank offers a compensating balance loan
Interest Rate = 9%
Compensating Balance requirement = 20%

Scenario 2: The bank offers a fee-added loan
Interest Rate = 11.5%
Additional Bank Fees = $5,575
Submitted: 8 years ago.Category: Business and Finance Homework
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Answered in 12 minutes by:
7/12/2010
Business Tutor: BusinessTutor,
 replied 8 years ago
BusinessTutor
Category: Business and Finance Homework
Satisfied Customers: 9,999
Experience: dasdasd
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Hello

 

I am not sure I understand the question, for the first scenario, is the interest 8% or 9%? For the second scenario, is it 11% or 11.5%? Is the additional fee $5,500 or $5,575?

 

 

 

 

 

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Customer reply replied 8 years ago
I had the same problem. I just ignored the numbers in the first part and went with the numbers at the end. I think my instructor made an error (but wasn't sure if there was something I was missing about the two sets of numbers?)
At any rate, I would say go with the second set of numbers
Business Tutor: BusinessTutor,
 replied 8 years ago

Sure :)

 

Please click here for the solution in excel

 

P.S. I will send you below the solution in word using different numbers (including the formulas) so that you can check to see if you can answer the question in word

 

Please click here

 

 

BusinessTutor
Category: Business and Finance Homework
Satisfied Customers: 9,999
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Customer reply replied 8 years ago
Why does the second scenario have a higher effective rate when the total amount that the loan will cost is lower?
Business Tutor: BusinessTutor,
 replied 8 years ago
I will leave that for you to discover :) Seriously, I want you to read carefully and see why, if you can't still figure it out, please advise and I will answer (Hint Check the denominators)
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Customer reply replied 8 years ago
Oh. the compensating balance isn't included in the effective rate?!
Business Tutor: BusinessTutor,
 replied 8 years ago
Yes :))
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Customer reply replied 8 years ago
thanks!
Business Tutor: BusinessTutor,
 replied 8 years ago

You are welcome :) I really enjoy working with people like you who want to learn not to just get solutions.

 

Wishing you all the best

 

 

P.S. If you like my services, please feel free to direct your future posts to me specifically by typing "For BusinessTutor" at the beginning of your post. Should you choose to do this, please try to allow me 48 hours before the deadline. If you need to meet me online for a timed assignment, please advise me of the date and time (EST) you want me to meet you here and I will. Please make sure you take the length of the questions into consideration when making your offer to avoid delays in providing solutions.

 

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