This is a problem similar to those found in Chapter 16. Angus Bank has issued a one-year loan commitment of S100 million for an up-front fee of 40 basis points. The back-end fee on the unused portion of the commitment is 15 basis points. The bank's base rate on loans is 5.5 percent, and loans to this customer carry a risk premium of 1.5 percent. The bank requires a compensating balance on loans of 7 percent to be placed and maintained in demand deposits and Angus Bank must maintain reserve requirements on demand deposits of 10 percent. The customer is expected to draw down 70 percent of the commitment at the beginning of the year a. What is the expected return on this loan? f1+ fx(1.td).(BRm)td I+k-1 Using the formula 1+k- 1+1(0.0040)+(0.0015)(1-0.70)+(0.055+0.015) (0.70)1/10.70-10.1000.70) 1-0.10B 1+k=1, , or k = Alternatively, using dollar values: Up-front fee = 0.0040 x S 100.000.000 Interest income0.0700 x Back-end fee = 0.0015 x S 100.000.000(1- Total revenue S100,000,000(0.7)S Funds committed = $100.000.000(0.7)-$4.900.000 (compensating balance $100,000,000(0.70)(0.07)) + $490,000 (reserve requirements on demand deposits $ 100,000,000(0.70)(0.07)(0.1 ),-$ Expected rate of return = Total Revenue/Funds Committed= $ percent. This is a problem similar to those found in Chapter 16. Angus Bank has issued a one-year loan commitment of S100 million for an up-front fee of 40 basis points. The back-end fee on the unused portion of the commitment is 15 basis points. The bank's base rate on loans is 5.5 percent, and loans to this customer carry a risk premium of 1.5 percent. The bank requires a compensating balance on loans of 7 percent to be placed and maintained in demand deposits and Angus Bank must maintain reserve requirements on demand deposits of 10 percent. The customer is expected to draw down 70 percent of the commitment at the beginning of the year a. What is the expected return on this loan? f1+ fx(1.td).(BRm)td I+k-1 Using the formula 1+k- 1+1(0.0040)+(0.0015)(1-0.70)+(0.055+0.015) (0.70)1/10.70-10.1000.70) 1-0.10B 1+k=1, , or k = Alternatively, using dollar values: Up-front fee = 0.0040 x S 100.000.000 Interest income0.0700 x Back-end fee = 0.0015 x S 100.000.000(1- Total revenue S100,000,000(0.7)S Funds committed = $100.000.000(0.7)-$4.900.000 (compensating balance $100,000,000(0.70)(0.07)) + $490,000 (reserve requirements on demand deposits $ 100,000,000(0.70)(0.07)(0.1 ),-$ Expected rate of return = Total Revenue/Funds Committed= $ percent
