Question
Suburb Bank has issued a 1 yr loan commitment of $10 million for an up-front fee of 50 basis points. The bank-end fee on the
Suburb Bank has issued a 1 yr loan commitment of $10 million for an up-front fee of 50 basis points. The bank-end fee on the unused portion of the commitment is 20 basis points. The banks bae rate on loans is 7%, and loans to this customer carry a risk premium of 2%. The bank requires a compensating balance of 10% to be placed in demand deposits and must maintain reserve requirements on demand deposits of 10%. The customer is expected to draw down 60% of the commitment at the beginning of the year. a. What is the expected return on this loan. b. What is the expected annual return on the loan if the draw-down on the commitment does not occur until the end of 6 months?
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