Collins Bank must decide how to price a new loan under the following conditions:

- Administrative costs: 1% of the loan balance

- Expected loss: 1.5% of the loan balance

- Funding sources have a 10% capital ratio (E/A), with a required rate of return of 15%

- Debt funds are purchased at a 5% interest rate and with a zero-reserve requirement

- Loan fees are 1%.

Question:

1) Calculate the weighted average funding cost of this loan and the interest rate charged on the loan.

2) What is the interest rate charged on the loan?

3) How would the interest rate change if the reserve requirement were 10%? What type of risk would the reserve requirement represent to the lender?