A bank is planning to make a loan of $18,100,000 to Revlon cosmetics. It expects to

charge an up-front fee of 0.5 percent and a servicing fee of 82 basis points. The loan has a maturity

of 35 years with duration of 20.4 years. The cost of funds (the RAROC benchmark) for the bank is

12.3 percent. Assume the bank has estimated the change in the credit risk premium on the cosmetic

sector to be approximately 4.9 percent, based on the last 3 months of historical data. The current

market interest rate for loans in this sector is 14.4 percent. What is RAROC?

RAROC = __________________

2.

In the problem above (1), what should be the duration be 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)?

Duration = ________________

3.

Suppose the value of your bond portfolio position is $15.7 million and your boss wants to

know the DEAR and VAR (value at risk) over the next 11 days. You know that the price

volatility is estimated to be 0.0105. What is the dollar expected loss for:

(A)

the DEAR =__________________________

(B)

the 11-day VAR = _____________________

4.

What is the

gross

return on a loan

if the bank requires the firm to hold 1.6 percent in

compensating balances, charges an origination fee of 0.0175 percent, the relevant firms risk

premium is 3.8%, the LIBOR is 3.1%, and the reserve requirement is 10%?

The Gross Return on the loan = __________________