Question

Metrobank offers one-year loans with a 4 percent stated (or base rate), charges a 0.15 percent loan origination fee, imposes a 15 percent compensating balance requirement, and must pay an 8 percent reserve requirement to the Federal Reserve. The loans typically are repaid at maturity. a) If the risk premium for a given customer is 1.5 percent, what is the simple promised interest return on the loan (this is solely just the interest rate)? b) What is the contractually promised gross return (k) on the loan per dollar lent?

Suppose that a bank does the following:

Sets a loan rate on a prospective loan at 8 percent (where BR = 5% and ϕ = 3%). 

Charges a 1/10 percent (or 0.10 percent) loan origination fee to the borrower. 

Imposes a 5% compensating balance requirement as noninterest-bearing demand deposits.

Pays reserve requirements of 10 percent imposed by the Fed on the bank’s demand deposits.

Calculate the bank’s return on this loan.

Answer 1

First question :-

Given,

Base rate = 4% or 0.04

Origination fee = 0.15% or 0.0015

Balance requirement = 15% or 0.15

Reserve requirement = 8% or 0.08

Solution :-

Second question :-

Given,

Base rate = 5% or 0.05

Risk premium = 3% or 0.03

Origination fee = 0.1% or 0.001

Balance requirement = 5% or 0.05

Reserve requirement = 10% or 0.10

Solution :-