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What is the return on the loan commitment

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Reference no: EM132992226

Question -

(a) Briefly explain off-balance-sheet assetsliabilities  and off-balance-sheet  with an appropriate non-market related OBS liability example.

(b) Assume a bank makes a loan commitment to the value of $10 million at a fixed interest rate of 9% per annum for a period of one year and up-front fee of 20 basis points. Assume the borrower only uses 70% of the provided funds over the course of the year. The bank requires a compensating balance on this loan of 10 per cent to be placed in demand deposits and no reserve requirements on demand deposits. If the bank charges a back-end fee of 0.3%, what is the return on the loan commitment?

(c) How is an FI exposed to interest rate risk when it makes loan commitments?

Reference no: EM132992226

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