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1- Al-Ahli Bank has issued a one-year commitment loan of BD 7 million at an interest rate of 5%. The Bank requires a compensating balance of 15% on loan given. The bank must maintain 5% reserve requirement on the compensating balance. The customer is expected to draw down 80% of the commitment. The total fees collected (up-front and Back end) from the customer are 12,280. What is the expected rate of return of this loan for the Bank?
Answer:
Loan given = 7m x 80% = $5,600,000
Compensating balance = 5,600,000 x 0.15 = ($840,000)
Required Reserve on Compensating Balance = $840,000 x 0.05 = 42,000
Actual loan given = $4,802,000
Interest amount on the loan given = 5,600,000 x 5% = $280,000
Fee charges = $12,280
Total charges = $292,280 Expected rate of return = $292,280 /$4,802,000 = 6.087%
2- Ali approached National Bank of Bahrain for a revolving credit line facility of BD 5 million.. For this facility. The loan and deposit activity for the period January 1st to March 31st is as follows:
1- The borrower will use an average of 75% of the facility
2- Contractual interest rate is 2% above the prime rate
3- Loan administration (annual cost) 0.7%
4- Risk expense (annual) 1.0%
5- Average demand ledger balance 4% + 2.5%
6- Average float 35% of the ledger of balance
7- Required reserve ratio 10%
8- Earning credit rate (annual) 5.5%
9- Weighted marginal cost of debt (annual) 7.5%
10- Relevant financing percentage 8% equity and 92% debt
11- Target pretax return to shareholders/annum 18%
12- Prime rate is 8%
13- Commitment fee (annual) 35 basis point
Analyze the loan request and determine whether this loan will meet profit objectives and cover the expenses during the loan period, i.e. is the loan interest equal to or greater or lower than expenses and target profit? (use 365 days).
Answer:
Expense components:
Loan administration expense = 0.007 x 90/365 x (5m x 0.75) = 6472.6
Risk expenses =
Answer:
Loan given = 7m x 80% = $5,600,000
Compensating balance = 5,600,000 x 0.15 = ($840,000)
Required Reserve on Compensating Balance = $840,000 x 0.05 = 42,000
Actual loan given = $4,802,000
Interest amount on the loan given = 5,600,000 x 5% = $280,000
Fee charges = $12,280
Total charges = $292,280 Expected rate of return = $292,280 /$4,802,000 = 6.087%
2- Ali approached National Bank of Bahrain for a revolving credit line facility of BD 5 million.. For this facility. The loan and deposit activity for the period January 1st to March 31st is as follows:
1- The borrower will use an average of 75% of the facility
2- Contractual interest rate is 2% above the prime rate
3- Loan administration (annual cost) 0.7%
4- Risk expense (annual) 1.0%
5- Average demand ledger balance 4% + 2.5%
6- Average float 35% of the ledger of balance
7- Required reserve ratio 10%
8- Earning credit rate (annual) 5.5%
9- Weighted marginal cost of debt (annual) 7.5%
10- Relevant financing percentage 8% equity and 92% debt
11- Target pretax return to shareholders/annum 18%
12- Prime rate is 8%
13- Commitment fee (annual) 35 basis point
Analyze the loan request and determine whether this loan will meet profit objectives and cover the expenses during the loan period, i.e. is the loan interest equal to or greater or lower than expenses and target profit? (use 365 days).
Answer:
Expense components:
Loan administration expense = 0.007 x 90/365 x (5m x 0.75) = 6472.6
Risk expenses =