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Calculate present value of expected interest margin

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SBSC bank currently pays 1.55% p.a. on 12-month term deposits and expects to be able to attract similar funds in 12 months' time at a cost of 1.35%. Accordingly, it has priced a fixed two-year loan of $5,500,000 at 1.0% over the expected cost of funds with interest paid annually. The day following the issue of the loan, the yield on both one- year and two-year maturity government bonds (indicators of market rates) decreased by 0.20% p.a.

(i) Ignoring all other assets and liabilities calculate the present value of the expected interest margin.

(ii) What is the importance of the loan-to-value ratio (LVR)? If the LVR is 55% for a loan based on a firm's accounts receivable, is the credit risk of the lender fully covered?

Reference no: EM133071960

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