A bank has a cost of funds of 7%, a default rate of 5% and an underwriting transaction cost of $25 per loan. To break even on a $100 loan, the bank must charge $7 to cover cost of funds, $5 to cover expected defaults, and $25 to cover transaction cost, totaling $37 or an interest rate of 37%. On a $400 loan, using the same cost of funds rate, default rate, and underwriting transaction cost above, the break even rate would be ____%. The interest rate for the $100 loan is ______ than the rate for the $400 loan due to ___________ against a smaller loan size.

a.

26.75%, lower, variable cost

b.

26.75%, higher, fixed cost

c.

18.25%, lower, variable costs

d.

18.25%, higher, fixed costs

Answer rating: 100% (QA)

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