Jerry's Company Is Looking at Various Financing Agreements

Essay

Jerry's Company is looking at various financing agreements. New Credit Union has agreed to loan the company $500,000 at 8% interest. Happy Bank has agreed to loan the company $500,000 at an interest rate of 6%. This is the lowest interest rate the company has been offered. However, as a condition to the loan, the company must maintain a compensating balance amount equal to 20% of the loan.
Required:
1. Determine the company's actual (effective)interest rate on the bank loan.
2. Which loan has the lowest interest cost?