Consider the Following Formula for Calculating the Contractually Promised Gross

question 40

Multiple Choice

Consider the following formula for calculating the contractually promised gross return on a loan k, per dollar lent: (1 + k) = 1 + [f + (BR + m) ]/ {1 - [b(1 - R) ]}.Which of the following statements is true?

• A)The denominator is the promised gross cash inflow to the FI per dollar.
• B)The denominator reflects direct fees plus the loan interest rate consisting of both, the base lending rate and the credit risk premium.
• C)The formula ignores present value aspects.
• D)The FI's net benefit from requiring compensating balances must consider the benefits of holding additional non-interest bearing reserve requirements.

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Definitions:

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