In Order to Finance a Shipment of Badminton Sets,Rujisawa Import-Export

question 62

Essay

In order to finance a shipment of badminton sets,Rujisawa Import-Export is seeking a $500,000 one-year bank loan.The Marine Bank requires that Rujisawa maintain a 20% compensating balance and requires four quarterly payments.The Prairie Bank requires only a 10% compensating balance,but requires 12 monthly payments.In addition,the Prairie Bank discounts the loan.Both banks state that their interest rate is 9%.
A)Which bank has the lowest annual interest rate? (NOTE: deduct the compensating balances from the principal in determining the annual rate.)
B)If Prairie Bank eliminated its compensating-balance requirement,would your answer change?

• A)Which bank has the lowest annual interest rate? (NOTE: deduct the compensating balances from the principal in determining the annual rate.)
• B)If Prairie Bank eliminated its compensating-balance requirement,would your answer change?

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Definitions:

Letter-of-Credit Transaction

A financial transaction in which a bank guarantees the payment of a buyer's obligations to a seller, provided that the seller meets the specified terms of the sales agreement.

Bill of Lading

A legal document between a shipper and carrier detailing the type, quantity, and destination of goods being shipped.

Contracted-for Shipment

An agreement to transport goods to a specified location under the terms of a contract.

Letter of Credit

A financial document issued by a bank guaranteeing a buyer's payment to a seller within a specified timeframe, providing security in international trade.