Union Trust Commercial Bank has issued a one-year $100 million loan commitment to a customer for an up-front fee of 25 basis points. In the analysis to compute its loan rate for this customer, the bank has determined that its base lending rate will be 10% and its margin to compensate the bank for default risk for this particular customer is 2%. The back-end fee for non-usage of the commitment is 10 basis points. The bank requires a 5 percent compensating balance in demand deposits on the entire amount of the commitment. The reserve requirement ratio on demand deposits at the central bank is 10 percent. What is the loan rate offered to this customer? What is effective return on the loan to the bank if 50 percent of the loan is taken down? In computing this return, do not take into consideration future values of fee or interest income received.
Union Trust Commercial Bank has issued a one-year $100 million loan commitment to a customer for an up-front fee of 25 basis points. In the analysis to compute its loan rate for this customer, the bank has determined that its base lending rate will be 10% and its margin to compensate the bank for default risk for this particular customer is 2%. The back-end fee for non-usage of the commitment is 10 basis points. The bank requires a 5 percent compensating balance in demand deposits on the entire amount of the commitment. The reserve requirement ratio on demand deposits at the central bank is 10 percent. What is the loan rate offered to this customer? What is effective return on the loan to the bank if 50 percent of the loan is taken down? In computing this return, do not take into consideration future values of fee or interest income received.
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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- Union Trust Commercial Bank has issued a one-year $100 million loan commitment to a customer for an up-front fee of 25 basis points. In the analysis to compute its loan rate for this customer, the bank has determined that its base lending rate will be 10% and its margin to compensate the bank for default risk for this particular customer is 2%. The back-end fee for non-usage of the commitment is 10 basis points. The bank requires a 5 percent compensating balance in demand deposits on the entire amount of the commitment. The reserve requirement ratio on demand deposits at the central bank is 10 percent. What is the loan rate offered to this customer? What is effective return on the loan to the bank if 50 percent of the loan is taken down? In computing this return, do not take into consideration
future values of fee or interest income received.
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