Use the following information on a one-year loan commitment to calculate the return on the loan commitment.
Question:
BR = FI’s base interest on the loans = 8%
Φ = Risk premium on loan commitment = 2.5%
f1 = Up-front fee on the whole commitment = 25 basis points
f2 = Back-end fee on the unused commitment = 50 basis points
b = Compensating balance on loans = 10%
RR = Reserve requirements = 8%
td = Expected (average) takedown rate on the loan commitment = 70%
The general formula for the promised return (1 + k) of the loan commitment is:
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Related Book For 
Financial Institutions Management A Risk Management Approach
ISBN: 978-0071051590
8th edition
Authors: Marcia Cornett, Patricia McGraw, Anthony Saunders
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