If a line of credit is given to a borrower for $2,000,000, with a stated rate of 10% on any used portion, a commitment fee of 0.50% on the unused portion of the line of credit. The average loan balance is 50% of the line of credit, and a compensating balance is required of 10% on the used portion of the loan commitment, and the bank has a reserve requirement of 10%, what is the actual implicit return to the bank?

Question

Quizplus · Accepted Answer

: Interest Expense = $1,000,000 x .10 = $100,000 
Non-interest Expense = Commitment fee .0050 x $1,000,000 = $5,000 
Compensating Balance Less Reserve Requirements 
= $1,000,000 x .10 (1 - .10) = $90,000 
Investable Funds = Loan Balance - Compensating Balance 
= $1,000,000 - $90,000 = $910,000 
Implicit Return = Total Expenses / Investable Funds 
= $105,000/$910,000 = .1154 or 11.54%

If a Line of Credit Is Given to a Borrower