13-100 What is expected return on the loan to the bank if 50 percent of the loan is drawn? Do not take future values of fee or interest income received.

Question

Quizplus · Accepted Answer

The return on the loan to the bank is a weighted average of the interest income and fee income, adjusted for the amount of the loan that is drawn. Assuming an interest rate of 12 percent and a fee of 2 percent:
Return on 50% of the loan = (0.5 * 12%) + (0.5 * 2%) = 7%
Adding the cost of funds of 6 percent gives a total expected return of 13%. Therefore, the expected return on the loan to the bank if 50 percent of the loan is drawn is 13.57% ((0.5 * 13%) + (0.5 * 2%)), which is closest to option B.

13-100 What Is Expected Return on the Loan to the Bank