(a) Citadel Bank desires to give its shareholders a return of 30% and the bank has an asset of GHC100 000.

00 and capital of GHC 10000.00.

You are to determine the desired profit margin. 5 marks(b) A prime customer of a bank wants a loan of GHC5000.00. The bank’s cost of fund is 12.5% and service charge is 2.5 %. Use the profit margin derived from question 2(a) above as the desired profit margin. You are to determine the price of the loan using the service cost model.

(c) Citadel Bank has made a risk assessment of one of its customers who has applied for a loan. The Bank is confident that there is 95% probability of the borrower repaying the principal and interest as schedule. It also estimated that in case of default the bank will recover about 85% of the principal and interest due. The bank quotes 14 rate on the loan, the cost of fund is 12% and cost of servicing the loan is 0.50. Using the profit margin determined from question 2(a) above you are required to:

I. Determine the risk premium

II. Determine the price of the loan