A bank charges a commercial borrower a 6.55% interest rate on a 1-year loan. The bank also charges a 0.5% origination fee and requires compensating balances of 7% in the form of demand deposits. Reserve requirements are 10%. What is the promised gross rate of return on the loan?

Question

Quizplus · Accepted Answer

We can use the formula [(Interest Rate + Origination Fee)/(1-Compensating Balance Rate*(1-Reserve Requirement Rate))] to calculate the promised gross rate of return. Plugging in the numbers, we get [(0.0655+0.005)/(1-0.07*(1-0.10))] which simplifies to 0.0752 or 7.52%. Therefore, the answer is D.

A Bank Charges a Commercial Borrower a 6