Suppose Your Firm Is Seeking a Five-Year, Amortizing $900,000 Loan

question 42

Multiple Choice

Suppose your firm is seeking a five-year, amortizing $900,000 loan with annual payments and your bank is offering you the choice between a $950,000 loan with a $50,000 compensating balance and a $900,000 loan without a compensating balance. If the interest rate on the $900,000 loan is 9.5 percent, how low would the interest rate on the loan with the compensating balance have to be in order for you to choose it?

• A) 9.5 percent
• B) 5.56 percent
• C) 7.43 percent
• D) Not enough information is given to determine

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Definitions:

Reward Allocation Norm

The set of principles or guidelines that govern how rewards, such as bonuses or recognition, are distributed among members of a group or an organization.

Reciprocity

A social norm of responding to a positive action with another positive action, rewarding kind actions as a way of ensuring mutual benefit or cooperation.

Status Hierarchy

An organizational or social system in which individuals or groups are ranked one above the other according to status or authority, influencing interactions and distribution of resources.

Status And Communication

The relationship between an individual's or group's social or professional standing and the manner or effectiveness of their interactions and information exchange.