A bank is planning to make a loan of $40,000,000 to CIQ Maxigram a firm in the steel industry. It expects to charge a servicing fee of 20 basis points. The cost of funds - the risk adjusted return on capital (RAROC benchmark) for the bank is 7.2 percent. Assume that bank has estimated the maximum change in the risk premium on the steel manufacturing sector to be approximately 1.25% based on two years of historical data. The current market interest rate for loans in this sector is 7.5%.

CIQ Maxigram presents two loans to the bank:

Loan A: Bullet loan interest only loan with principal repaid at the end of the loan life with duration of 6.75 years and a maturity of 10 years.

Loan B: Amortised loan interest and principal with duration of 4.8 years and a maturity of 10 years.

Using the appropriate model determine whether the bank should make the loan?