Sun Bank has issued a one-year $5 million loan commitment to a customer for an up-front fee of 15 basis points and at a fixed rate of 12 percent.The back-end fee for the unused portion of the commitment is 5 basis points.The bank requires a 10 percent compensating balance in demand deposits.Reserve requirements on demand deposits are 10 percent. Assume 50 percent of the loan is drawn and that there are reserve requirements of 10 percent on demand deposits.What should the bank charge as back-end fees if they require an expected return of 13.63 percent? Do not take future values of fees or interest income received.

Question

Quizplus · Accepted Answer

The bank needs to calculate the back-end fee that will allow them to achieve an expected return of 13.63%. Given the loan commitment, compensating balance, and reserve requirements, the bank must adjust the back-end fee to meet the desired return. Calculating the effective return considering these factors, 10 basis points is the correct back-end fee to achieve the target return.

Sun Bank Has Issued a One-Year $5 Million Loan Commitment