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Question
A $40,000 one-year loan with a 1% origination fee and a 7.50% interest rate is funded with money on which the bank owes 3%. What is the expected pretax dollar spread on the loan? If the bank needs to net at least 3.5% on the funds lent to make its ROE, how many dollars can the bank spend on credit investigation, loan servicing, etc.? Would the bank be able to spend more if the loan amount was greater? What does this example suggest about credit analysis?
Answer
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