2. What risk premium will a financial institution require on a $25 million loan given the following information:

the financial institution needs an expected return of 6.75% in order to generate the desired profit for its investors;

the expected default rate on loans of this type is 3%;

if the borrower defaults on the loan, the financial institution expects to recover 70% of the total return;

the financial institutions base rate covers its costs of funds (2.5%) and overhead (2%); and

the lender charges an origination fee of 0.375% of the loan amount.