11) An Fl has issued a one-year loan commitment of $2 million for an up-front fee of 25 basis points. The back-end fee on the unused portion of the commitment is 10 basis points. The Fl's base rate on loans is 7.5% and loans to this customer carry a risk premium of 2.5%. The FI requires a compensating balance on loans of 5% in the form of demand deposits. Reserve requirements on demand deposits are 8%. The customer is expected to draw down 80% of the commitment at the beginning of the year. a. What is the expected return on the loan without taking future values into consideration? 1+k={ (0.0025+0.001 (1-0.8) + (0.0075+0.025) *0.8}/(0.8-0.05(0.8)(1-0.08) K=10.836% b. What is the expected return using future values? That is, the net fee and interest income are evaluated at the end of the year when the loan is due. 1 + k = 1 + [.0025 (1.06)+.0010 (.2) + (.1)0.80 / 0.80 - 0.0368] K=10.886%