4. (24 points) SDSC bank is planning to make a loan of $5,000,000 to a firm in the steel industry. It expects to charge a servicing fee of 40 basis points. The loan has a maturity of 8 years with duration of 7.5 years. The cost of funds (the RAROC benchmark) for the bank is 10 percent. The bank has estimated the maximum change in the risk premium on the steel manufacturing sector to be approximately 4.2 percent, based on two years of historical data. The current market interest rate for loans in this sector is 12 percent. a. (8 points) Using the RAROC model, determine whether SDSC bank should make the loan? b. (8 points) What the duration should be if this loan can be approved? c. (8 points) Assuming that duration cannot be changed, how much additional interest and fee income will be necessary to make the loan acceptable? 4. (24 points) SDSC bank is planning to make a loan of $5,000,000 to a firm in the steel industry. It expects to charge a servicing fee of 40 basis points. The loan has a maturity of 8 years with duration of 7.5 years. The cost of funds (the RAROC benchmark) for the bank is 10 percent. The bank has estimated the maximum change in the risk premium on the steel manufacturing sector to be approximately 4.2 percent, based on two years of historical data. The current market interest rate for loans in this sector is 12 percent. a. (8 points) Using the RAROC model, determine whether SDSC bank should make the loan? b. (8 points) What the duration should be if this loan can be approved? c. (8 points) Assuming that duration cannot be changed, how much additional interest and fee income will be necessary to make the loan acceptable