Question

In: Economics

As a bank loan officer, you are now in charge of setting interest rates for short...

As a bank loan officer, you are now in charge of setting interest rates for short term loans. A customer comes in asking for a $10,000 loan for 1 year. As a bank, you will not offer a loan in which your real return on investment is at least 3%. You also know the FED is setting its inflation goal for this year at 2%. Assuming you trust the FED will meet its stated goal, what is the minimum nominal interest rate you can charge for this loan?

Group of answer choices

$500

5%

300

3%

Solutions

Expert Solution

Answer) 5%

Explanation: The Fisher Effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. Therefore, real interest rates fall as inflation increases, unless nominal rates increase at the same rate as inflation. It is given that real return on investment is atleast 3% and inflation set for the year is 2%, therefore, nominal interest rate = real interest rate + inflation. Thus, minimum nominal interest rate is 5% (3% + 2%).


Related Solutions

Suppose you are a loan office for a bank, and you want to compare interest rates...
Suppose you are a loan office for a bank, and you want to compare interest rates on first mortgages at your branches last month. YOu collect the following data: number 21, 41 mean interest rate 6.60% , 5.90% standard deviation 0.35%, 0.28% . Set up the hypothesis with the proper H0 and H1. Find the F critical value for a=0.05
You are a loan officer for National Bank. You have a loan application submitted by a...
You are a loan officer for National Bank. You have a loan application submitted by a company for $50,000. This company just got a prior loan for $45,000 and has not made the first payment. This gives you an uneasy feeling as you examine a loan application from ABC, Co. The application included the following financial statements. ABC, Co. Income Statement For the Year Ended December 31, 2018 Sales revenue                                 $100,000 Cost of goods sold                         (50,000) Depreciation expense                   ...
You have lent a floating rate loan to a borrower. Now, the interest rates are likely...
You have lent a floating rate loan to a borrower. Now, the interest rates are likely to decline. Which instrument could you use to protect yourself against a risk of declining interest rates? Select one: a. Reverse repo b. Short hedge in Futures c. Interest rate Cap d. Long hedge in Futures e. Repo
If you were a loan officer at a bank and the owner approached you for a...
If you were a loan officer at a bank and the owner approached you for a loan, what information would you require to help make your decision ?
Assume that you are a commercial loan officer for a bank and are preparing to meet...
Assume that you are a commercial loan officer for a bank and are preparing to meet with a corporate client. The client has approached you seeking an increase in the loan it has with the bank. Prepare a list of things that you would want to know about the company’s operations before you decide whether to approve the increase in the loan.
Assume that you are a commercial loan officer for a bank and are preparing to meet...
Assume that you are a commercial loan officer for a bank and are preparing to meet with a corporate client. The client has approached you seeking an increase in the loan it has with the bank. Prepare a list of things that you would want to know about the company’s operations before you decide whether to approve the increase in the loan Please help!
4) If you were the bank loan officer would you recommend renewing the loan or demand...
4) If you were the bank loan officer would you recommend renewing the loan or demand its repayment? Would your actions be influenced if, in early Year 2, Computron (the company) showed you its projection plus proof that it was going to raise over $1.2 million of new equity capital? PS: Year 2 data is estimation. Year 2 Year 1 Year 0 Industry Current Ratio 1,86x 1,1x 2,3x 2,7x Quick Ratio 0,67x 0,4x 0,8x 1,0x Inventory turnover 4,10x 4,5x 4,8x...
You are the loan officer at the local bank. A customer in good standing seeks to...
You are the loan officer at the local bank. A customer in good standing seeks to borrow money to start a business. The customer informs you that they will be able to repay the bank a lump sum of $45,000 in 3 years. What is the most you would be willing to lend this customer if the required interest rate is 15%? Assume interest compounds annually.
Assume that you are a Loan Officer at the local bank. Company A wants to get...
Assume that you are a Loan Officer at the local bank. Company A wants to get a long-term loan from your bank.    Company B wants to get a long-term loan from your bank. Company C also wants to get a long-term loan from your bank. The TOTAL DEBT RATIO for Company A is .70 and the TIMES INTEREST EARNED RATIO for Company A is .70 for the year. The TOTAL DEBT RATIO for Company B is .75 and the TIMES...
You are a loan officer for First Benevolent Bank. You have an uneasy feeling as you...
You are a loan officer for First Benevolent Bank. You have an uneasy feeling as you examine a loan application from Daring Corporation. The application included the following financial statements. DARING CORPORATION Income Statement   For the Year Ended December 31, 2018     Sales revenue $100,000 Cost of goods sold (50,000) Depreciation expense (5,000) Remaining expenses   (25,000)    Net income $ 20,000 DARING CORPORATION Balance Sheet December 31, 2018 Cash $ 5,000 Accounts receivable 25,000 Inventory 20,000 Operational assets 55,000 Accumulated depreciation...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT