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A bank has issued a one-year loan commitment of $2 million for an upfront fee of 25 basis points. The back-end fee on the unused
A bank has issued a one-year loan commitment of $2 million for an upfront fee of 25 basis points. The back-end fee on the unused portion of the commitment is 10 basis points. The banks cost of funds is 7%, and interest on the loan is 9%. The client is expected to withdraw 60% of the commitment at the beginning of the year. What is the expected return on this loan? Discuss the take-down risk on the value of this bank.
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