Question
A bank is considering making a loan with a duration of four years of $10 million at a rate of 12%. The 99th percentile increase
A bank is considering making a loan with a duration of four years of $10 million at a rate of 12%. The 99th percentile increase in risk premium for similar risk bonds has been estimated to be 5.5%. The fee income on this loan is 0.4% and the spread over the cost of funds is 1%. The ROE is 10%.
a. What would be the expected net income of the loan?
b. What would be the capital (or loan) risk?
c. What would be the RAROC?
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Foundations of Finance The Logic and Practice of Financial Management
Authors: Arthur J. Keown, John D. Martin, J. William Petty
8th edition
132994879, 978-0132994873
