Loan Scenarios - Loan Scenarios Christy Thornton FIN/200 Mernoush Banton Midland Chemical Co is negotiating a loan from Manhattan Bank and Trust

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Loan Scenarios Christy Thornton FIN/200 June 13, 2010 Mernoush Banton Midland Chemical Co. is negotiating a loan from Manhattan Bank and Trust. The small chemical company needs to borrow $500,000. The bank offers a rate of 8¼ percent with a 20 percent
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Loan Scenarios 2 compensating balance requirement, or as an alternative, 9¾ 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. a. Which loan carries the lower effective rate? Consider fees to be the equivalent of other interest. Compensating balance loan = $500,000 x 8 ¼%= $41,250 (interest) Compensating balance requirement = 20% or $100,000 Effective rate= interest/available funds = $41,250/$400,000 = 10.3% Additional fees loan= $500,000 x 9 ¾% = $48,750 (interest) $48,750 + $5,500 = $54,250 Effective Rate = interest + fees/loan = $54,250/ $500,000 = 10.85% The loan with the compensating balance requirement has the lower effective rate. b.
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This note was uploaded on 06/26/2010 for the course FIN FIN 200 taught by Professor Banton during the Spring '10 term at University of Phoenix.

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Loan Scenarios - Loan Scenarios Christy Thornton FIN/200 Mernoush Banton Midland Chemical Co is negotiating a loan from Manhattan Bank and Trust

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