Question
A bank has a cost of funds of 10%, a default rate of 5% and an underwriting transaction cost of $25 per loan. To break
A bank has a cost of funds of 10%, a default rate of 5% and an underwriting transaction cost of $25 per loan. To break even on a $100 loan, the bank must charge $10 to cover cost of funds, $5 to cover expected defaults, and $25 to cover transaction cost, totaling $40 or an interest rate of 40%. On a $70 loan, using the same cost of funds rate, default rate, and underwriting transaction cost above, the break even rate would be ____%. The interest rate for the $100 loan is ______ than the rate for the $70 loan due to ______ that is a lower percentage of the principal.
a. | 41%, higher, variable cost | |
b. | 51%, lower, fixed cost
| |
c. | 41%, lower, fixed cost
| |
d. | 51%, higher, variable costs
|
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