Chapter 20 Building Risk-Adjusted Pricing Models

Chapter Outline

  • Loan Pricing Models 492
  • Stochastic Net Borrowed Funds Pricing Model 494
    • Fees in Lieu of Balances 494
    • Rates 497
    • Facility Fees 498
      • Commitment Fee 498
      • Facility Fee 498
      • Prepayment Penalty Fee 498
      • Agent’s Fee 499
      • Management Fee 499
      • Miscellaneous Fees 499
    • Cost of Funds 499
    • Service and Administrative Costs 499
    • Hurdle Rate 500
  • Output Screen and Yield Calculation 500
  • Moving From Deterministic Pricing to a Stochastic Pricing Solution 502
  • Loan Pricing Lessons 505

A bank acquires funds through deposits, borrowing, and equity, recognizing the cost of each source and the resulting average cost of funds to the total bank. The funds are allocated to assets, ...

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