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A bank can charge a corporate borrower 5.50% on a loan. The borrower is asking for a $700,000 loan. The extreme loss rate on this

A bank can charge a corporate borrower 5.50% on a loan. The borrower is asking for a $700,000 loan. The extreme loss rate on this loan type is 4.25% and when default occurs, about 10% of the loan amount is recovered. The interest and noninterest cost of the loan is 5.25%.

a) What is the RAROC of the loan?

b) Under what circumstances should the bank make the loan?

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