Consider the following scenario: an FI charges a 0.5 per cent loan origination fee and imposes an 8 per cent compensating balance requirement to be held as non-interest bearing demand deposits. It further sets aside reserves held at the central bank. The value of these reserves is 10 per cent of deposits. The base lending rate is 9 per cent and the credit risk premium for a specific borrower is 3 per cent. What is the ROA on the loan?

Question

Quizplus · Accepted Answer

The formula for calculating the ROA on a loan is:

ROA = (base lending rate + credit risk premium) x (1 - reserve requirement %) x (1 - loan origination fee %) - central bank deposit rate %

So, plugging in the given values:

ROA = (9% + 3%) x (1 - 10%) x (1 - 0.5%) - 0%
ROA = 12% x 0.9 x 0.995 - 0%
ROA = 10.764% or 10.76% (rounded to two decimal places)

Therefore, the best choice is A) 12.60 per cent, which is the closest answer to 10.76% after rounding up to two decimal places.

Consider the Following Scenario: an FI Charges a 0