Assume a Bank Grants a Loan Commitment at an Interest

question 67

Multiple Choice

Assume a bank grants a loan commitment at an interest rate of 10% per annum and the risk premium on the loan is 2%.The bank charges borrowers an upfront fee on the whole commitment of 0.25% and a back-end fee on any unused proportion of the loan of 0.5%.The compensating balance is 10% and so are reserve requirements.Assume that the average draw-down of the loan is 80% over the time of the loan commitment.What is the promised return on the loan commitment (round to two decimals) ?

• A)12.00%
• B)12.75%
• C)13.23%
• D)13.67%

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Definitions:

Chart of Accounts

An organized list of all the financial accounts in a company's accounting system.

Cash Account

An account that records all transactions involving cash inflows and outflows, including receipts, disbursements, and balances.

Debited

An accounting entry that increases an asset or expense account, or decreases a liability or equity account.

Cash Receipts

The collection of money, including coins, notes, cheques, and electronic transfers, by a business from transactions involving goods or services.