Consider the Following Scenario: an FI Charges a 0

question 21

Multiple Choice

Consider the following scenario: an FI charges a 0.5 per cent loan origination fee and imposes an 8 per cent compensating balance requirement to be held as non-interest bearing demand deposits. It further sets aside reserves held at the central bank. The value of these reserves is 10 per cent of deposits. The base lending rate is 9 per cent and the credit risk premium for a specific borrower is 3 per cent. What is the ROA on the loan?

• A) 12.60 per cent
• B) 11.00 per cent
• C) 11.50 per cent
• D) Not enough information to solve the question.

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Definitions:

Direct Method

A cash flow statement presentation that itemizes the major categories of gross cash receipts and payments, providing a clearer view of a company's cash flow from operating activities.

Ending Inventory

The total value of a company's merchandise, raw materials, work-in-progress, and finished goods at the end of an accounting period.

Ceiling Constraint

In accounting, the maximum value that inventory can be reported at, ensuring that assets are not overstated.

Floor Constraint

A limitation in inventory accounting that prevents the value of inventory from being reported below a certain level.