A Bank is planning to make a loan of $$5,000,000$ to a firm in

the steel industry. A Bank expects to charge a servicing fee of $50$ basis points. The loan has

a maturity of $8$ years with a duration of $7\mathrm{.}5$ years. The cost of funds $($the RAROC

benchmark$)$ for the bank is $10$ percent. A Bank has estimated the maximum change in the

risk premium on the steel manufacturing sector to be approximately $4\mathrm{.}2$ percent, based on

two years of historical data. The current market interest rate for loans in this sector is $12$

percent.

a$.$ Using the RAROC model, determine whether A Bank should make the loan.

b$.$ What should be the duration in order for this loan to be approved?

c$.$ Assuming that the duration cannot be changed, how much additional interest and fee

income will be necessary to make the loan acceptable?

d$.$ Given the proposed income stream and the negotiated duration, what adjustment in the

loan rate would be necessary to make the loan acceptable?