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  3. a fi has issued a one-year loan commitment of $2 m

A FI has issued a one-year loan commitment of $2 million for an up-front fee...

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Accounting

A FI has issued a one-year loan commitment of $2 million for an up-front fee of 25 basis points. The back-end fee on the unused portion of the commitment is 10 basis points. The FIs base rate on loans is 7.5 percent and loans to this customer carry a risk premium of 2.5 percent. The FI requires a compensating balance on loans of 5 percent in the form of demand deposits. Reserve requirements on demand deposits are 8 percent. The customer is expected to draw down 80 percent of the commitment at the beginning of the year.

a. What is the expected return on the loan without taking future values into consideration? (10 marks)

b. What is the expected return using future values? That is, the net fee and interest income are evaluated at the end of the year when the loan is due? (2 marks)

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