13-103 What is the expected return on the loan to the bank if 50 percent of the loan is drawn using discounted cash flows? That is,the return has to be estimated at the beginning of the loan period using present values.Assume there are reserve requirements of 10 percent on demand deposits.

Question

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The expected return on the loan is calculated using the discounted cash flow method, taking into account the reserve requirement. The reserve requirement reduces the effective amount available for lending, which affects the return calculation. The correct calculation leads to an expected return of 12.59 percent.

13-103 What Is the Expected Return on the Loan to the Bank