In Order to Finance a Shipment of Badminton Sets, Rujisawa

question 54

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:

Aggrandizing

The act of increasing in size, power, or status.

Proxemics

The study of human use of space and the effects that population density has on behaviour, communication, and social interaction.

Territorial Space

The physical or psychological space that individuals or groups claim as their own and may defend against encroachment by others.

Perception

The process of recognizing, organizing, and interpreting sensory information to understand the environment or situation.