What is expected return on loan without taking future values

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Problem

A Financial Institution (FI) has issued a one-year loan commitment of $2 million for an up-front fee of 25 basis points. The back-end fee on the unused portion of the commitment is 10 basis points. Assume that the FI's base rate on loans is 7.5% and loans to customers carry a risk premium of 2.5%. Assume also that the FI requires a compensating balance on loans of 5% in the form of demand deposits, the reserve requirements on demand deposits are 8%, and that the customers are expected to draw down 80% of the commitment at the beginning of the year. (i) What is the expected return on the loan without taking future values into consideration? (ii) What is the expected return using future values? Get the instant assignment help. That is, the net fee and interest income are evaluated at the end of the year when the loan is due? (iii) How is the expected return in part (ii) affected if the reserve requirements on demand deposits are zero? (iv) How is the expected return in part (ii) affected if compensating balances are paid a nominal interest rate of 1.5%?

Reference no: EM133926840

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