Compute the expected return on a loan

Reference no: EM131265240

Using the CAPM for Loan Pricing A bank computes the nominal interest rate rL that it charges on a certain type of loan by the following formula:

where δ = the proportion of defaulting loans, assuming the proceeds of a defaulting loan are zero. ϒ_L = the management cost per unit of loan. r = the interbank rate, taken as the riskless rate. π = the risk premium demanded by stockholders. a = the capital coefficient required for this type of loan.

1. Compute the expected return on a loan, and show that the preceding pricing formula is closely related to the CAPM approach.

2. Assuming that the bank has a monopoly power on the loans side but faces a competitive market on the liabilities side, compute what should be the modified pricing formula, for given d and b, as a function of the elasticity of the demand for loans.

3. How should the formula be modified if the bank faces a tax on profits at a rate t?

Reference no: EM131265240

Questions Cloud

Compute the total general and administrative expenses : Webster Corporation's monthly projected general and administrative expenses include $5,400 administrative salaries, $2,800 of other cash administrative expenses, $1,550 of depreciation expense on the administrative equipment, and .5% monthly interest..

Persuasive messages in high and low context cultures : How do persuasive messages in high- and low-context cultures differ? - List five or more topics that an organization might feature in a press release.

Explain limitations of what the evaluator can and cannot say : Examine the limits of confidentiality. How might those limits be affected by some of the information contained in the scenario? Discuss specific circumstances in the case study in which there might be a duty to report or duty to warn. Explain the lim..

Definition of innovation based on researching the topic : Provide a definition of innovation based on researching the topic. Write 150 Words

Compute the expected return on a loan : Assuming that the bank has a monopoly power on the loans side but faces a competitive market on the liabilities side, compute what should be the modified pricing formula, for given d and b, as a function of the elasticity of the demand for loans.

Analyzing the sports festival event : Suppose, you are an Event Manager for organizing, Analyzing the Sports Festival Event. Write a detailed report of about 2000 words for organizing Sports Festival Event including Researching background information,

Agents submit completed expense reimbursement : Agents submit a completed expense reimbursement form to their branch manager at the end of each week. The branch manager reviews the expense report to determine whether the claimed expenses are reimbursable based on the company’s expense reimbursemen..

Role of fayol pillars of management : Examine the role of Fayol's pillars of management and how they may conflict or conversely fit with contemporary organizations and management theories. Explain comprehensively why or how a manager might reconcile happily the two approaches to manag..

Strategic management in dynamic environments : You, Mike, and Tiffany meet in a conference room to begin to assemble your final presentation. This presentation will be the project deliverable, so you want to make sure you have provided all of the requirements.

User Account

All Pages