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QUESTION 3

(a) Citadel Bank desires to give its shareholders a return of 30% and the bank has an asset of GHC100 000.

00 and capital of GHC 10000.00.

You are to determine the desired profit margin. 5 marks(b) A prime customer of a bank wants a loan of GHC5000.00. The banks cost of fund is 12.5% and service

charge is 2.5 %. Use the profit margin derived from question 2(a) above as the desired profit margin. You

are to determine the price of the loan using the service cost model. 5 marks

(c) Citadel Bank has made a risk assessment of one of its customers who has applied for a loan. The Bank is

confident that there is 95% probability of the borrower repaying the principal and interest as schedule. It also

estimated that in case of default the bank will recover about 85% of the principal and interest due. The bank

quotes 14 rate on the loan, the cost of fund is 12% and cost of servicing the loan is 0.50. Using the profit

margin determined from question 2(a) above you are required to:

I. Determine the risk premium 8 marks

II. Determine the price of the loan 2 marks

PART B (ANSWER ANY ONE QUESTION)

QUESTION 4

Miss Bajadu is one of your cherished customers who has maintained a satisfactory account for the past 12 years.

She has been promoted and wants to relocate to an area that befits her current status. Her monthly salary

amounts to GHC 12000.00.

Today you saw her loan application request among days collections. She indicates that she intends to sell her

current house located in the out sketch of the city and use the money to acquire a new one. She wants your bank

to assists her acquire her dream house. According to her, the existing house valued at GHC 75,000. 00 and her

dream house is valued at GHC 95,000.00. The existing house has no an outstanding mortgage. She has been

able to obtain a mortgage of GHC 30,000 for the new house. She has not been able to identify a buy for her

house.

You are required to indicate your banks position to her request 20 marks