Question

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

Answer 1

the promised gross rate of return on the loan is 7.52%

Step-by-step explanation:

The computation of the promised gross rate of return is shown below:

= (Rate of interest + Origination fees) ÷ [1 - (Demand deposit x (1 - Reserve requirement)]

= (6.55% + 0.5%) ÷ [1 - (7% × (1 - 10%)]

= (0.0655 + 0.005) ÷ [1 - (0.07 × (1 - 0.10)]

= 0.0705 ÷ (1 - 0.063)

= 0.0705 ÷ 0.937

= 0.07524 or 7.52%

Hence, the promised gross rate of return on the loan is 7.52%