1. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter 19 Pricing Business Loans The purpose of this chapter is to explore the different methods used by bankers today to price business loans and to evaluate the strengths and weaknesses of these pricing methods for achieving a bank’s goals.

3. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Methods Used to Price Business Loans Cost-Plus Pricing Models Price Leadership Pricing Models Below Prime Market Pricing (Markup Model) Loans Bearing Maximum Interest Rates Customer Profitability Analysis

4. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Cost-Plus Loan Pricing

5. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Price Leadership Model

6. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Prime Rate Major Banks Established a Base Lending Fee During the Great Depression. At that Time It Was the Lowest Interest Rate Charged Their Most Credit Worthy Customers for Short-Term Working Capital Loans

7. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. LIBOR The London Interbank Offer Rate. The Rate Offered on Short-Term Eurodollar Deposits With Maturities Ranging From a Few Days to a Few Months

8. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Below-Prime Market Pricing

9. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Cap Rate Model Banks Offer a Floating Rate Loan With an Agreed Upon Upper Limit on the Loan Contract Regardless of the Course of Future Interest Rates

10. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Customer Profitability Analysis (CPA) Estimate Total Revenues From Loans and Other Services Estimate Total Expenses From Providing Net Loanable Funds Estimate Net Loanable Funds Estimate Before Tax Rate of Return By Dividing Revenues Less Expenses By Net Loanable Funds