A bank is planning to make a loan of $16,500,000 to Revelon cosmetics. It expects to charge an up-front fee of 0.4 percent and a servicing fee of 75 basis points. The loan has a maturity of 12 years with duration of 10.4 years. The cost of funds (the RAROC benchmark) for the bank is 5.2 percent. Assume the bank has estimated the change in the credit risk premium on the cosmetic sector to be approximately 5.4 percent, based on the last 2 months of historical data. The current market interest rate for loans in this sector is 9.4 percent. (That is, the percentage change in the credit risk premium, %DR is 0.0494)

(A.) Using the RAROC model, estimate whether the bank should make the loan?

(B.) What should be the duration in order for this loan to be approved (or what is the duration of the loan where the bank is indifferent to making the loan)?