Question
9. A proposed loan of $8m has total annual interest rate 5.875% and fees of 0.25%. The loans duration is 6.14 years. The lenders cost
9. A proposed loan of $8m has total annual interest rate 5.875% and fees of 0.25%. The loans duration is 6.14 years. The lenders cost of funds is 5.525%. Comparable loans have a yield of 5.875%. The expected maximum change in the loan rate due to a change in the credit risk premium for the loan is 0.85%. (This value is based on actual change in credit risk premium for the worst 1% of comparable loans over some prior period.)
a. What is the risk adjusted return on capital (RAROC) on this loan?
b. If the lender requires RAROC to exceed 25%, how could the terms of the loan be changed to make this loan acceptable?
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