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The banks offers a rate of 8 1/4 percent with a 20percentcompensating 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 interest rate changes) and the loan would be for one year.

A. Which loan carries the lower effective rate?Consider 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 months, what would the effective rate be? (principal equals amount borrowed minus the compensating balance).

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