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 to the bank if 50 percent of the loan is drawn immediately and there are no reserve requirements on demand deposits? Do not take future values of fees or interest income received.

A) 13.45 percent.
B) 13.57 percent.
C) 13.60 percent.
D) 13.72 percent.
E) 13.90 percent.

Correct Answer:

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