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Commercial Bank is planning to make a loan of $5 000 000 to a firm in the consumer retail industry. It charges a servicing fee
Commercial Bank is planning to make a loan of $5 000 000 to a firm in the consumer retail industry. It charges a servicing fee of 245 basis points. It imposes an 8% compensating balance requirement to be held as a non-interest bearing demand deposit. It sets aside reserves held at the Reserve Bank of Australia, the value of these reserves is 10% of deposits. The Bank's base interest rate is 8% and has a credit risk premium of 2.5%. What is the expected return on the loan if the probability of repayment is 95%?
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