Introduction to Finance

TA B L E 1 6 . 1
 Merging Banks
Banks and Financial
Services Firms in Existence
Sometime During 1990–2016 
Surviving Banks 
in 2016 after Merger
JPMorgan 
Manufacturers Hanover Trust
Chemical Bank
Chase Manhattan Bank
Banc One
First Chicago
NBD Bancorp
Washington Mutual
Bear Stearns
JPMorgan Chase & Co.
Bank of America
Continental Bank
Security Pacific
Nations Bank
Barnett
Bank Boston
Bay Bank
Fleet
Shawmut
Fleet Boston
LaSalle Bank
Countrywide Financial
Merrill Lynch
Bank of America
Wells Fargo
First Union
Signet
CoreStates
Norwest Corporation
Greater Bay Bancorp
Wachovia Bank
Wells Fargo
5
Jathon Sapsford and Paul Sherer, “Fewer Banks Means Costlier Credit Lines,” 
The Wall Street Journal
,
 
(March 14, 
2001), pp. C1, C16.

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16.3 Providers of Short-Term Financing
501
Although the practice is diminishing, some banks require a 
compensating balance
of 10 
to 20 percent of outstanding unsecured loans be kept on deposit by some borrowers. The most 
frequently cited justifi cation for this requirement is that, because banks cannot lend without 
deposits, bank borrowers should be required to be depositors. But compensating balances 
are a means of increasing the eff ective cost of borrowing by increasing the amount on which 
interest is computed.
Computing Interest Rates 
Chapter 9 illustrated how to use time value of money concepts to calculate interest rates. 
The same concepts can be used to calculate the true cost of borrowing funds from a bank. 
If, for example, Eastnorth Manufacturing can borrow $10,000 for six months at 8 percent 
annual percentage rate (APR), the six-month interest cost will be 8 percent/2 × $10,000, or 
$400. Eastnorth will repay the $10,000 principal and $400 in interest after six months. As we 
learned in Chapter 5, the true, or eff ective, interest rate on this loan is the following:
EAR = (1 + APR/
m
)
m
– 1 
(16-1)
or
(1 + 0.08/2)
2
– 1 = 0.0816, or 8.16 percent
At times banks will discount a loan. A