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A bank is in the process of making a $2,000,000 loan. The bank will charge 8% interest on the loans. The cost of funds for
A bank is in the process of making a $2,000,000 loan. The bank will charge 8% interest on the loans. The cost of funds for the bank is 6% with an expected loss of 0.80%. Operating expenses are estimated at 0.75%. If the unexpected loss (economic capital) is estimated at 3% what is the RAROC? should it make the loan if the banks minimum RAROC for this category is 14%? Explain and show work.
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