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Midland Chemical Co. is negotiating a loans from Manhattan Bnak and Trust. The small chemical company needs to borrow $500,000.

Midland Chemical Co. is negotiating a loans from Manhattan Bnak and Trust. The small chemical company needs to borrow $500,000. The bank offers a rate of 8 1/4 percent with a 20 percent compensating balance requirement, or as an alternative, 9 3/4 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 interst rate changes), and the loan would be for one year.

a. which loan carries the lower effective rate? Condiser fees to be the equivalent of other interest.
b. If the loan with a 20 percent compensating balance requirement were to be paid off in 12 monthly payments, what would the effective rate be? (Principal equals amount borrowed minus the compensating balance.)

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