Question

Metrobank offers one-year loans with a 13 percent stated rate, charges a 1/4 percent loan origination fee, imposes a 7 percent compensating balance requirement, and must pay a 4 percent reserve requirement to the Federal Reserve. What is the return to the bank on these loans?

Answer 1

Given that;
Metrobank offers one-year loans with a 13% stated rate.
It charges a 1/4 percent loan origination fee, imposes a 7% compensating balance requirement, and 4% reserve requirement.

The formula we will use to solve the question is:
1+ Return to the bank=1+[Loan origination fee charge+Stated rate]/[1-(Compensating balance requirement)*(100%-Reserve requirement)]

Substituting the values, we get;
1+ Return to the bank=1+[(1/4)%+13%]/[1-(7%)*(100%-4%)]
=>Return to the bank=[(1/4)%+13%]/[1-(7%)*(100%-4%)]
=[0.25%+13%]/[1-(7%)*(0.96)]
=[13.25%]/[1-(0.0672)]
=0.1325/(0.9328)
=0.142045455 or 14.20% (Rounded to 2 decimal places)

Answer:Hence, the return to the bank is 14.20%