Use the following information to answer questions 1-4

Sun Bank has issued a one-year $10 million loan commitment to a customer for an upfront fee of 25 basis points and at a fixed rate of 12 percent. The back-end fee for non-usage of the commitment is 10 basis points. The bank requires a 10 percent compensating balance in demand deposits. Reserve requirements on demand deposits are 10 percent.

1.What is expected return on the loan to the bank if 60 percent of the loan is drawn? Do not take future values of fee or internet income received.

2. What is the expected return on the loan at the end of the year if 60 percent of the loan is drawn? Estimate using future values of fee and interest income received, that is, return is defined as all fee and interest income earned at year-end as a percentage of funds used. Assume the cost of funds to the bank is 8 percent.

3. What is the expected return on the loan to the bank if 60 percent of the loan is drawn and there are no reserve requirements on demand deposits? Do not take future values of fee or interest income received.

4. What is the expected return in #2 affected if compensating balances are paid a nominal interest rate of 5%?