8. What are the characteristics of a loan commitment that an FI may make to a customer? In what manner and to whom is the commitment an option? What are the various possible pieces of the option premium? When does the option or commitment become an on-balance-sheet item for the FI and the borrower?

10. Use the following information on a one-year loan commitment to calculate the return on the loan commitment: BR = FI's base interest rate on the loans = 8% Risk Premium on loan commitment = 2.5%. Upfront fee on the whole commitment = 25 basis points Back-end fee on the average unset portion of the commitment = 50 basic points. Competing balance on loan = 10%. Reserve requirements = 8%. Expected(average) takedown rate on the loan commitment = 70%.