As a senior loan officer at MC Bancorp, you have the following loan applications waiting for review. The bank uses Altmans Z score, default probabilities, mortality rates, and RAROC to assess loan acceptability. The banks cost of equity (the RAROC benchmark) is 8 percent. The banks loan policy states that the maximum probability of default for loans by type is as follows: Loan Type and Maturity Maximum Allowable Default Probability AAA-rated 0.50% A-rated 1.25 Which of the following loans should be approved and which rejected?

A $2 million, 5-year loan to a BBB-rated corporation in the computer parts industry. MC Bancorp charges a servicing fee of 75 basis points. The duration on the loan is 4.3 years. The cost of funds for the bank is 8 percent. Based on 4 years of historical data, the bank has estimated the maximum change in the risk premium on the computer parts industry to be approximately 6 percent. The current market rate for loans in this industry is 10 percent.