Sun Bank Has Issued a One-Year $5 Million Loan Commitment

Sun Bank has issued a one-year $5 million loan commitment to a customer for an up-front fee of 15 basis points and at a fixed rate of 12 percent.The back-end fee for the unused portion of the commitment is 5 basis points.The bank requires a 10 percent compensating balance in demand deposits.Reserve requirements on demand deposits are 10 percent.

What is the expected return on the loan at the end of the year if 50 percent of the loan is drawn? Estimate using future values of fee and interest income received,that is,return is defined as all fee and interest income earned at year-end as a percentage of funds used.Assume the cost of funds to the bank is 8 percent.

A) 13.45 percent.
B) 13.57 percent.
C) 13.60 percent.
D) 13.72 percent.

Correct Answer:

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