Consider the following scenario: an FI charges a 0.5% loan origination fee and imposes an 8% 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% of deposits.The base lending rate is 9% and the credit risk premium for a specific borrower is 3%.What is the ROA on the loan?

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The ROA on the loan is 12.60%. This is calculated as follows:Loan origination fee: 0.5%Compensating balance requirement: 8%Reserves held at the central bank: 10%Base lending rate: 9%Credit risk premium: 3%The effective interest rate on the loan is 9% + 3% = 12%. The ROA on the loan is 12% - 0.5% - 8% - 10% = 12.60%.

Consider the Following Scenario: an FI Charges a 0