Assignment on Dhabi Commercial Bank (ADCB) has the following sources of funds: $300 million in capital and surplus, $325 million in demand deposits, $680 million in time and savings deposits, and $200 million in subordinated debt. a. Explain with calculation what is the maximum dollar amount of real estate loans that ADCB can grant? (2.5 marks)

Answer:

ADCB

·         Demand deposit $325

·         Capital surplus $300

·         Saving deposits $680

·         Subordinate debt $200

ADCB can Grant:

= $680 * 70%

= $476 million

$476 million is the maximum dollar amount of real estate loan that ADCB can grant

b. Explain with calculation what is the maximum dollar amount ADCB bank may lend to a single customer?                                                                                                                       (2.5 marks)

Answer:

ADCB can lend:

= $300 * 15%

= $45 million

$45 million is the maximum dollar amount ADCB bank may lend to a single customer

Question (2): Answer the following question:                                                                    (5 Marks)

Ø  Describe the essential differences between the following deposit pricing methods in use today: cost-plus pricing, and conditional pricing.

Answer:

Cost-plus deposit pricing allows banks to determine how much cost they are experienced in terms of management time and labor etc. while they were offering deposit service to their customers. In Cost-plus pricing the bank charges deposit fees from their customers so that all the expenses of offering deposit service to the customer can be covered. In addition, the bank maintains a margin of profit by doing cost-plus pricing as well. Conditional pricing, on the other hand, allows the banks to attract those customers which the bank wants to have as their customers.

Today banks use conditional pricing as a technique or tool for attracting clients. In this method the bank post schedule which contain the detail of fees charged for different types of deposits and the interest rates which the bank is offering to the customers or clients. Usually on a large number of deposits the bank provides a large amount of interest return and charges less fee on large deposits. This encourages the customers to kept high deposits in the bank and provides the bank the opportunity to invest the fund in earning assets.

Question (3): Answer the following questions:                                                       (6 Marks)

1. A customer wants to borrow $1,200 from Edmond State Bank. Edmond State Bank has an add-on loan with an interest rate of 12 percent and monthly payments for one year. What are the monthly payments this customer will need to make on this loan?                               (2 marks)

Answer:

Interest charges = Principal *interest

1200*0.12 = 144

Monthly payment = (principal +interest) /12

= (1200+144)/12

=112

2. A customer wants to borrower $25,000 for one year from TRC State Bank. The bank offers a discount loan with an interest rate of 15 percent. How much of the loan will be available to the customer?                                                                                                                         (2 marks)

Answer:

The amount borrowed = 25000

Interest rate = 15%

Discount loan = amount borrowed *interest rate

=25000*15%

=3750

Amount received = amount borrowed – discount loan

=25000-3750

=21250

3. A customer is seeking a $150,000 home mortgage. The bank requires the customer to pay 1¾ points upfront. How much of the loan amount will actually be available to the customer if the bank approves the loan?                                                                                               (2 marks)

Answer:

Upfront charge = 1.75%

= Amount of loan (1-Upfront charge)

= 150000 (1-.0175)

=150000*.9825

=147375

Q4): Answer the following question:                                                                                     (4 Marks)

Ø  A bank has determined the information below for one of its customers. This customer wants to borrow $1,000,000 but will maintain an average deposit balance in its account of $200,000. Calculate the expected net rate of return on this loan?

Answer:

Return = Revenue-Cost / (loan-Deposit Balance)

= (1,000, 000+15000+5000+6000)-(30,000+890,000+8000+16000)/ (1,000,000-200,000)

= 82000/800000

=10.25%