Question

The bank has determined the information below for one of its customers. This customer wants to borrow $1,000,000 but will maintain an average deposit balance in its account of $200,000. What is the expected net rate of return on this loan

Answer 1

Answer:

C) 10.25 percent

Explanation:

using the attached information, we can prepare the client's income statement:

total revenues                                                    $1,026,000

    interest revenues $1,000,000

    commitment fee $15,000

    deposit service fees $5,000

    agency fees $6,000

total expenses                                                    ($944,000)

    deposit interest $30,000

    cost of others funds raised $890,000

    loan processing costs $8,000

    activity and record keeping costs $16,000

net income                                                            $82,000

since the customer invested $800,000 (= $1,000,000 - $200,000) and earned $82,000, the net rate of return = $82,000 / $800,000 = 0.1025 or 10.25%