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Explanation:
From the table, a one-year non-amortizing bullet loan should have received a charge of 1 bp if originated pre-crisis, and 5 bps if arisen more recently. Given the principal of the loan as $5 million. This should have translated to charges of $500(0.0001 × 5,000,000) and $2,500(0.0005 × 5,000,000), respectively, to the business unit(s) writing the loans.
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Q.4207 Suppose the following term liquidity premiums and the average cost of funds were recorded by a bank at a point before the crisis (Pre-GFC), and more recently.
Pre-GFC and Current Term Liquidity Premiums and Average Cost of Funds
| Term in years | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|
| Pre-Global Financial Crisis | |||||
| Term liquidity premium | 1 | 3 | 5 | 7 | 10 |
| Average cost of funds | 3 | 3 | 3 | 3 | 3 |
| Current | |||||
| Term liquidity premium | 5 | 8 | 10 | 18 | 35 |
| Average cost of funds | 10 | 10 | 10 | 10 | 10 |
Assume that the principal of the loan was $5 million. Using the matched-maturity marginal cost of funds approach, calculate the charge that a one-year loan translated to the business unit(s) writing the loans if it originated pre-crisis and more recently, respectively.
A
$100 and $500
B
$500 and $2,500
C
$1,000 and $2,000
D
$2,000 and $2,500