Calculate The Expected Return On Loan With A Recovery Chance Of 90%

Question

1. LNW Bank is charging a 12 percent interest rate on a $5,000,000 loan.  The bank also charged $100,000 in fees to originate the loan. The bank has a cost of funds of 8 percent. The borrower has a five percent chance of default, and if default occurs, the bank expects to recover 90 percent of the principal and interest.

a. What is the expected return on the loan using the KMV model?
             a. 6.50 percent; b. 5.50 percent; c. 6.00 percent; d. 14.0 percent; e. 13.5 percent.

b. What is the risk of the loan using the KMV model?
             a. 4.75 percent; b. 0.48 percent; c. 6.89 percent; d. 2.18 percent; e. 1.50 percent.
 

2. A $200 million loan commitment has an up-front fee of 20 basis points and a backend fee of 25 basis points on the unused portion.

a. The up-front fee is
    a. $250,000; b. $4,000,000; c. $400,000; d. $775,000; e. $375,000.

b. If 50 percent of the commitment is taken down, the backend fee is
    a. $250,000; b. $4,000,000; c. $400,000; d. $775,000; e. $375,000.

c. If 25 percent of the commitment is taken down, the total fees are
    a. $250,000; b. $4,000,000; c. $400,000; d. $775,000; e. $375,000.


Summary

These short questions belong to Finance and. The 1st question is about a bank which offers a $5 million and if the borrower defaults the banks expects to recover at least 90% of the principle. The 2nd question is about a $200 million loan has an up-front fee of 20 basis points and backend fee of 25 basis points. These two questions have been answered with calculations.

Total Word Count 78

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