Assume a bank’s review of its historical loan losses has been estimated at 2% for its auto loans. The interest rate is 6%. The bank currently has gross auto loans of $1,000,000. If the bank determines that the optimal or desired rate (r) for its auto loans is 7.8% 12% 13% 6.44% 9.13% 8.16% 10.68%
Assume a bank’s review of its historical loan losses has been estimated at 2% for its auto loans. The interest rate is 6%. The bank currently has gross auto loans of $1,000,000. If the bank determines that the optimal or desired rate (r) for its auto loans is 7.8% 12% 13% 6.44% 9.13% 8.16% 10.68%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Assume a bank’s review of its historical loan losses has been estimated at 2% for its auto
loans. The interest rate is 6%. The bank currently has gross auto loans of $1,000,000. If the bank determines that the optimal or desired rate (r) for its auto loans is
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7.8% |
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12% |
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13% |
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6.44% |
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9.13% |
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8.16% |
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10.68% |
Expert Solution
Step 1
Loss on loan is 2% of $1,000,000 =$20,000
Total interest to be earned on gross loan = 6%*1,000,000 = $60,000
Hence, to adjust the interest and get an optimal interest, the amount should be = $20,000 + $60,000 = $80,000 on the net loan amount of $980,000 ($1,000,000-$20000).
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