A bank is planning to make a loan. A bank analyst is asked to calculate the return on the loan using the following formula: 1+ k = I 1+ (of +(BR+)) (1-[b(1-RR)]) 1- Provide an economic interpretation of this equation (numerator/denominator)? [5 marks] The bank sets the loan rate at 11 percent (where the base lending rate = 10% and the credit risk premium 1%). It charges a 1/10 percent loan origination fee to the borrower and imposes a 10 percent compensating balance requirement to be held as non-interest-bearing demand deposits. Finally, it sets aside reserves, at a rate of 10 percent of deposits. 2- Compute the ROA of the loan? [10 marks] Suppose now that the fees are zero and the compensating balance is zero. 3- What is the fundamental factor driving the ROA of the loan? What adjustment in the loan interest rate would be necessary to make the loan have the same ROA. [5 marks] A bank is planning to make a loan. A bank analyst is asked to calculate the return on the loan using the following formula: 1+ k = I 1+ (of +(BR+)) (1-[b(1-RR)]) 1- Provide an economic interpretation of this equation (numerator/denominator)? [5 marks] The bank sets the loan rate at 11 percent (where the base lending rate = 10% and the credit risk premium 1%). It charges a 1/10 percent loan origination fee to the borrower and imposes a 10 percent compensating balance requirement to be held as non-interest-bearing demand deposits. Finally, it sets aside reserves, at a rate of 10 percent of deposits. 2- Compute the ROA of the loan? [10 marks] Suppose now that the fees are zero and the compensating balance is zero. 3- What is the fundamental factor driving the ROA of the loan? What adjustment in the loan interest rate would be necessary to make the loan have the same ROA. [5 marks]