A bank has issued a one-year loan commitment of $2,000,000 for an up-front fee of 25 basis points that is received at the beginning of the year on the entire commitment. The back-end fee on the unused portion of the commitment is 10 basis points at the end of the year when the loan matures. The bank requires a compensating balance of 5 percent as demand deposits on the used portion of the commitment. The interest rate on the loan is 10 percent and is paid at the end of the loan, and reserve requirements on demand deposits are 8 percent. The customer is expected to draw down 80 percent of the commitment at the beginning of the year, and pay the loan off in one year with interest.

Q3: Compute the effective interest rate in question (Q1) affected if the reserve requirements on demand deposits are zero as they are today. Show your work.

a) 10.4000 percent

b) 10.8300 percent

c) 10.8556 percent

d) 10.8816 percent

e) 9.90 percent