A bank has made a 8-year, $5,000,000 loan that pays annual interest of 9 percent. The principal is due in 8 years.The bank is willing to sell this loan with recourse at an 9.4 percent discount rate.The bank also has the option to sell this loan without recourse at a discount rate of 9.8 percent.The bank expects to receive no interest payments or principal if the loan is defaulted.If the bank estimates a 1 percent probability of default on this loan over its 8-year life, what does it expect to receive if the loan is sold with recourse? Is it better off selling this loan without recourse?Why?

An FI is planning to issue $12,000,000 in commercial loans. It will finance all of it by issuing demand deposits.What is the minimum demand deposits it needs to attract in order to fund this loan if you assume there is a 12 percent average reserve requirement on demand deposits, all reserves are held in the form of cash, and $5,000,000 of funding is through equity?

An FI is planning to issue $11,000,000 in commercial loans. It will finance all of it by issuing demand deposits. What is the minimum capital required if there are no reserve requirements?

A bank is charging a rate of 12.00% on a loan, and the probability of default is 5% with a 60% salvage value.What is the highest required return such that this loan would be made?

An FI is planning to give a loan of $5,000,000 to a firm in the steel industry. It expects to charge an up-front fee of 0.5 percent and a service fee of 5 basis points. The loan has a maturity of 8 years. The cost of funds (and the RAROC benchmark) for the FI is 12 percent. The FI has estimated the risk premium on the steel manufacturing sector to be approximately 0.22 percent, based on two years of historical data. The current market interest rate for loans in this sector is 12.30 percent. The 99th (extreme case) loss rate for borrowers of this type has historically run at 5 percent, and the dollar proportion of loans of this type that cannot be recaptured on default has historically been 89 percent. Using the RAROC model, the FI

A bank offers one-year loans with a 7 percent stated rate, charges a 0.4 percent loan origination fee, imposes a 8 percent compensating balance requirement, and must pay a 15 percent reserve requirement to the Federal Reserve. What is the return to the bank on these loans?