You Have Just Taken Out a Loan for $75,000

Multiple Choice

You have just taken out a loan for $75,000. The stated (simple) interest rate on this loan is 10 percent, and the bank requires you to maintain a compensating balance equal to 15 percent of the initial face amount of the loan. You currently have $20,000 in your checking account, and you plan to maintain this balance. The loan is an add-on installment loan which you will repay in 12 equal monthly installments, beginning at the end of the first month.
-First National Bank of Micanopy has offered you the following loan alternatives in response to your request for a $75,000, 1-year loan.
Alternative 1: 7 percent discount interest, with a 10 percent compensating balance.
Alternative 2: 8 percent simple interest, with interest paid monthly. What is the effective annual rate on the cheaper loan?

A) 8.00%
B) 7.23%
C) 7.67%
D) 8.43%
E) 8.30%