The treasurer of your company has instructed you to establish a $10,000,000 line of credit for your business. You have contacted three banks with the following loans available. The current prime rate is 6%.
Bank A: Prime + 1%, 15% compensating balances, commitment fee of 0.30% on the unused amount of the credit line.
Bank B: Prime + 0.5%, 20% compensating balance, commitment fee of 0.20% on the unused amount of the credit line.
Bank C: Prime + 1.5%, 10 % compensating balances, commitment fee of 0.05% on the unused amount of the credit line.
a) Find the effective interest rate for each loan.
b) Which loan should you choose and why?