Suppose Your Firm Is Seeking a Seven-Year, Amortizing $400,000 Loan

Suppose your firm is seeking a seven-year, amortizing $400,000 loan with annual payments and your bank is offering you the choice between a $410,000 loan with a $10,000 compensating balance and a $400,000 loan without a compensating balance. If the interest rate on the $400,000 loan is 9.5 percent, how low would the interest rate on the loan with the compensating balance have to be in order for you to choose it?

A) The rate would have to be lower than 8.76 percent.
B) The rate would have to be lower than 8.29 percent.
C) The rate would have to be lower than 8.14 percent.
D) The rate would have to be lower than 7.99 percent.