In most cases the primary objective is to price the loans at a level that gives the bank a return on the capital employed above some target rate set by management, this is sometimes referred to as the hurdle rate. Provided that this hurdle rate is equal to, or greater than, the business unit’s cost-of-equity [...]
Credit Risk
In addition to the spread that banks seek to take account of the term of the loan, banks seek an additional spread to compensate for credit, or default, risk. There are very few occasions when a bank will make a loan to a customer where it expects the borrower to be unable to meet the [...]