Explanation:
To calculate the dollar charge for the cost of contingent liquidity risk, we follow these steps:
$20.0 million - $6.0 million = $14.0 million.$14.0 million × 65.0% = $9.1 million.$9,100,000 × 0.0015 = $13,650.Ultimate access to all questions.
20.15.3. Suppose a line of credit (LOC) with a limit of $20.0 million has $6.0 million already drawn. Assume there is a 65.0% chance the customer will draw on the remaining credit. The bank's term liquidity premiums (over a five-year horizon) are shown here:
| Term in years | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|
| Term liquidity premium | 5 | 9 | 15 | 25 | 40 |
| Average cost of funds | 8 | 8 | 8 | 8 | 8 |
The line of credit (LOC)'s cost of funding the liquidity cushion presumes a three-year (3 year) term. What is the LOC's dollar charge for the cost of contingent liquidity risk?
A
$4,500
B
$9,000
C
$13,650
D
$25,950
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