Bank ABC offers one-year loans with an 8 per cent stated or base rate, charges a 0.5 per cent loan origination fee, imposes an 8 per cent compensating balance requirement, and must pay a 5 per cent reserve requirement to the central bank. The loans typically are repaid at maturity. If the risk premium for a given loan is 1.5 per cent, what is the contractually promised gross return on this loan per dollar lent? (0.5 marks)Question 13Answera.11.65 %b.8.74 %c.10.82 %d.9.73 %e.12.53 %

To calculate the contractually promised gross return on the loan per dollar lent, we need to consider all the costs and returns associated with the loan.

1. The base rate is 8%, which is the initial return the bank expects on the loan.

2. The loan origination fee is 0.5%, which is an additional cost to the borrower and thus an additional return for the bank.

3. The compensating balance requirement is 8%, which means the borrower must keep 8% of the loan amount in a non-interest-bearing account with the bank. This effectively reduces the amount of the loan the borrower can use, increasing the effective interest rate.

4. The reserve requirement is 5%, which is a cost to the bank as it must keep this percentage of the loan amount in reserve and cannot lend it out. This does not directly affect the return on the loan.

5. The risk premium is 1.5%, which is an additional return the bank requires to compensate for the risk of the loan.

Adding these together, the contractually promised gross return on the loan per dollar lent is 8% (base rate) + 0.5% (origination fee) + 1.5% (risk premium) = 10%.

However, we also need to adjust for the compensating balance requirement. The borrower effectively only receives 92% of the loan amount (100% - 8% compensating balance), so the effective interest rate is 10% / 92% = 10.87%.

So, the closest answer is c. 10.82%.