Type or paste question here

Commerce Bank makes a $1,000,000 business term loan. All interest and principal will be paid after one year. The bank offers a 4% prime rate to its best customers. Based on the loan officers credit analysis, the appropriate risk premium for this business borrower is estimated to be 2%. The bank charges a 0.2% origination fee to cover costs incurred during the underwriting and some of the overhead expenses. The borrower is required to keep a 10% compensating balance according to the contract. The Federal Reserve imposes a 3% minimum reserve requirement on all banks.

Questions: 1). What is the return to the Bank on this loan?

2). If the borrower has 3% chance of defaulting and the loss given default is 40%, what is the expected return on this loan?

3) If the return is not large enough, what can this bank do to increase the return and expected return?