A bank charges a commercial borrower a 6.55 percentage interest rate on a one-year loan. the bank also charges 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?

Question

Eaton

Business

27 March, 13:41

A bank charges a commercial borrower a 6.55 percentage interest rate on a one-year loan. the bank also charges 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?

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August Cain · Answer 1

The solution would be like this for this specific problem:

(0.005 + 0.0655) / [1 - (0.07 * (1 - 0.10)) ] = 7.52%

So if reserved requirements are 10%, then the promised gross rate of return on the loan is 7.52%.