Suburb Bank has issued a one-year loan commitment of $10 million for an up-front fee of 50

Question:

Suburb Bank has issued a one-year loan commitment of $10 million for an up-front fee of 50 basis points. The back-end fee on the unused portion of the commitment is 20 basis points. The bank’s base rate on loans is 7 percent, and loans to this customer carry a risk premium of 2 percent. The bank requires a compensating balance on loans of 10 percent to be placed in demand deposits and must maintain reserve requirements on demand deposits of 10 percent. The customer is expected to draw down 60 percent of the commitment at the beginning of the year.

a. What is the on this loan?

b. What is the expected annual return on the loan if the draw-down on the commitment does not occur until at the end of six months?

Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...