Consider the following scenario: an FI charges a 0.5% loan origination fee and i
ID: 2614012 • Letter: C
Question
Consider the following scenario: an FI charges a 0.5% loan origination fee and imposes a 10% 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 15% of deposits. What is the base lending rate if the credit risk premium is 3.055% and the ROA on the loan is 17%?
A. 11.5%
B. 13.945%
C. 12%
D. 20.055
Consider the following scenario: an FI charges a 0.5% loan origination fee and imposes a 10% 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 15% of deposits. What is the base lending rate if the credit risk premium is 3.055% and the ROA on the loan is 17%?
Explanation / Answer
Answer:C. 12%
ROA = [ ( loan origination fee + (base lending rate + credit risk premium))/1 - (compensation balance )(1-deposit reserve %)
17% = [ (0.005 + ( x + 0.03055))/ 1 - (0.10)(0.85)]
x = 0.12 or 12%
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