Assume a Bank Grants a Loan Commitment at an Interest

Multiple Choice

Assume a bank grants a loan commitment at an interest rate of 10 per cent p.a. and the risk premium on the loan is 2 per cent. The bank charges borrowers an upfront fee on the whole commitment of 0.25 per cent and a back-end fee on any unused proportion of the loan of 0.5 per cent. The compensating balance is 10 per cent and so are reserve requirements. Assume that the average draw-down of the loan is 80 per cent over the time of the loan commitment. What is the promised return on the loan commitment (round to two decimals) ?

A) 12.00 per cent
B) 12.75 per cent
C) 13.23 per cent
D) 13.67 per cent