Question
A) Bank Autumn has issued a one-year loan commitment of $18 million for an up-front fee of 9 basis points. The back-end fee on the
A) Bank Autumn has issued a one-year loan commitment of $18 million for an up-front fee of 9 basis points. The back-end fee on the unused portion of the commitment is 6 basis points. The compensating balance of 7 per cent as demand deposits is required. The interest rate on the loan is 8 per cent, cost of capital is 4% and reserve requirements on demand deposits are 5 per cent. The customer is expected to draw down 70 per cent of the commitment at the beginning of the year.
A. i) Calculate the expected return on the loan without taking future values into consideration?
A. ii) Calculate and discuss the expected annual return on the loan if the draw-down on the commitment does not occur at the end of six months?
I would appreciate if you can help help me with this. Thank you for your help :)
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