If you have a loan amount of $10,000,000, an interest rate of 5.0%, a cost of funds of 2.75%, fees of $10,000, expenses of $5,000, a loss given default rate of 25%, and a default probability of 0.5%, what is the risk-adjusted return?

If you have a loan amount of $10,000,000, an interest rate of 5.0%, a cost of funds of 2.75%, fees of $10,000, expenses of $5,000, a loss given default rate of 25%, and a default probability of 0.5%, what is the risk-adjusted return?

• A. $217,500
• B. $150,000
• C. $250,000
• D. $185,000

Answer: (A)

To determine the risk-adjusted return, it is essential to understand how to calculate the expected income from the loan, the costs, and the expected losses due to defaults. 1. **Calculate the interest income**: The annual interest income generated from the loan is calculated by multiplying the loan amount by the interest rate. For a loan of $10,000,000 at an interest rate of 5.0%, the interest income is: \[ \text{Interest Income} = 10,000,000 \times 0.05 = 500,000 \] 2. **Calculate the total funding cost**: The cost of funds represents the cost to the lender for obtaining the capital provided for the loan. This can be calculated as: \[ \text{Cost of Funds} = 10,000,000 \times 0.0275 = 275,000 \] 3. **Add the fees and expenses**: The total fees and expenses add to the operational costs of managing the loan. Adding in each: \[ \text{Total Fees and Expenses} = 10,000 + 5,000 = 15,

To determine the risk-adjusted return, it is essential to understand how to calculate the expected income from the loan, the costs, and the expected losses due to defaults.

1. Calculate the interest income:

The annual interest income generated from the loan is calculated by multiplying the loan amount by the interest rate. For a loan of $10,000,000 at an interest rate of 5.0%, the interest income is:

[

\text{Interest Income} = 10,000,000 \times 0.05 = 500,000

]

2. Calculate the total funding cost:

The cost of funds represents the cost to the lender for obtaining the capital provided for the loan. This can be calculated as:

[

\text{Cost of Funds} = 10,000,000 \times 0.0275 = 275,000

]

3. Add the fees and expenses:

The total fees and expenses add to the operational costs of managing the loan. Adding in each:

[

\text{Total Fees and Expenses} = 10,000 + 5,000 = 15,