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Consider the following scenario: an FI charges a 0.5 per cent loan origination fee and imposes an 8 per cent compensating balance requirement to be
Consider the following scenario: an FI charges a 0.5 per cent loan origination fee and imposes an 8 per cent compensating balance requirement to be held as non-interest bearing demand deposits. It further sets aside reserves held at the central bank. The value of these reserves is 10 per cent of deposits. The base lending rate is 9 per cent and the credit risk premium for a specific borrower is 3 per cent. What is the Expected return of this loan if the probability of payment 95 per cent (round to two decimals)?
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