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Confidence Bank has made a loan to Risky Corporation
Confidence Bank has made a loan to Risky Corporation. The loan terms include a base lending rate of 7 percent, a risk premium of 6 percent, an origination fee of 0.1875 percent, and a 9 percent compensating balance requirement. Required reserves at the Fed are 6 percent. What is the expected or promised gross return on the loan?
a.
11.13 percent.
b.
11.90 percent.
c.
14.41 percent.
d.
14.56 percent.
e.
12.22 percent.
Expert Solution
Promised Gross return on a loan can be calculated using the below formula:
1+K = 1+((f+(BR+m)/1-([b(1-RR))
where
k = Promised gross return on loan
f = Origination fee = 0.1875%
BR = Risk-free Borrowing rate = 7%
m = margin (risk premium) = 6%
b = compensating balance = 9%
RR = Reserve Requirement = 6%
Subtituting these values in the formula above:
1+K = 1+((0.1875%+(7%+6%)/1-([9%(1-6%))
k = (0.131875 / 0.9154)
k = 0.1441 = 14.41%
Therefore, promised return on loan = 14.41%. Th correct option is C "14.41%.
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