aianjie

 

6、The following information pertains to a loan:

Base lending rate = 5.0%.

Risk premium = 1.2%.

Origination fee = 0.25%.

Compensating balance required = 10.0%.

Reserve requirement = 15.0%.

The contractually promised rate of return on the loan is closest to:

A) 8.66%.

B) 9.05%.

C) 7.05%.

D) 6.28%. 

aianjie

 

The correct answer is C

The contractually promised return would be 7.05%, computed as follows:

 

 

 

[attach]13898[/attach]

aianjie

 

7、A loan has the following characteristics:

    ?  Base lending rate = 12%.

    ?  Risk premium = 3%.

    ?  Compensating balance requirement = 5%.

    ?  Loan origination fee = 0.5%.

    ?  Reserve requirement = 10%.

The contractually promised gross return on the loan is:

A) 16.23%.

B) 15.71%.

C) 16.67%. 

D) 20.94%.

aianjie

 

The correct answer is

The promised rate of return on a loan, k, is determined using the following formula:

 

[attach]13899[/attach] 

 

where:

L     = the base lending rate

m    = the risk premium

f      = the loan origination fee

b     = the compensating balance requirement

R     = the reserve requirement

aianjie

 

8、If a bank increases the percentage of compensating balances required for a loan, the contractually promised rate of return on the loan would be:

A) higher. 

B) not enough information. 

C) the same.

D) lower. 

aianjie

 

The correct answer is A

Increasing the compensating balance would mean less cash investment for the bank, increasing the promised return.

aianjie

 

9、If a borrower keeps less than the agreed compensating balance on deposit with the lending bank, the actual return to the lending bank on the loan will:

A) more than the promised yield.

B) still equal the promised rate.

C) be sold to a participating investor.

D) be less than the promised yield.

aianjie

 

The correct answer is D

If a borrower keeps less on deposit than the agreed compensating balance, the bank will earn less on the loan than the promised return.

aianjie

 

AIM 2: Analyze the relationship between the promised return and the expected return on a loan.

If the contractually promised rate of return on a loan is 8.5 percent and the probability of repayment is 98 percent, the expected return on the loan is closest to:

A) 6.88%.

B) 7.58%.

C) 6.33%. 

D) 8.33%.

aianjie

 

The correct answer is C

The expected return includes the probability that the loan will be repaid:

 

 

[attach]13900[/attach]