In Order to Finance a Shipment of Badminton Sets, Rujisawa

question 33

Essay

In order to finance a shipment of badminton sets, Rujisawa Import-Export is seeking a $700,000 one-year bank loan. The Marine Bank requires that Rujisawa maintain a 25% compensating balance and requires four quarterly payments. The Lincoln Bank requires only a 15% compensating balance, but requires 12 monthly payments. In addition, Lincoln discounts the loan. Both banks state that their interest rate is 8%.
a) Which bank has the lowest effective interest rate?
(NOTE: Deduct the compensating balances from the principal in determining the effective rate.)
b) If Lincoln Bank eliminated its compensating-balance requirement, would your answer change?

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Definitions:

Mutual Consideration

The exchange of value or promises that each party agrees to in a contractual agreement.

The Code

A term often used to refer to a specific body of systematic and comprehensive laws or regulations governing a particular area, such as the Uniform Commercial Code.

Illusory

Something that is deceptive or lacks real substance or existence.

Lacks Consideration

A term indicating that a contract or agreement is void or invalid due to the absence of something of value being exchanged.