As a senior loan officer at MC Bancorp, you have

the following loan applications waiting for review.

The bank uses Altman's $Z$ score, default probabili$-$

ties, mortality rates, and RAROC to assess loan

acceptability. The bank's cost of equity $($the RAROC

benchmark$)$ is $8$ percent. The bank's loan policy

states that the maximum probability of default for

loans by type is as follows:

sau$13820\_$ch$10\_278-328.$indd $32810/30/1903$:$04$ PM

$328$ Part Two Measuring Risk

$4.$ A $$2$ million, five$-$year loan to a BBB$-$rated corpo$-$

ration in the computer parts industry. MC Ban$-$

corp charges a servicing fee of $75$ basis points.

The duration on the loan is $4\mathrm{.}5$ years. The cost of

funds for the bank $($the RAROC benchmark$)$ is $8$

percent. Based on four years of historical data, the

bank has estimated the maximum change in the

risk premium on the computer parts industry to

be approximately $5\mathrm{.}5$ percent. The current mar$-$

ket rate for loans in this industry is $10$ percent.