1.CountrySide Bank uses the Moody’s Analytics Portfolio Manager model to evaluate the risk–return characteristics of the loans in its portfolio. A specific $10 million loan earns 2 per cent per year in fees and the loan is priced at a 4 per cent spread over the cost of funds for the bank. For collateral considerations, the loss to the bank if the borrower defaults will be 20 per cent of the loan’s face value. The expected probability of default is 3 per cent.

What is the anticipated return on this loan? What is the risk of the loan? LO 11.3