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?

3. An A-rated corporate loan with a maturity of 3 years. A-rated corporate loans are evaluated using the mortality rate approach. A schedule of historical defaults (annually and cumulative) experienced by the bank on its A-rated corporate loans is as follows: Years after Issuance Loan type 1 year 2 years 3 years 4 years A-rated corporate loans Annual default 0.10% 0.25% 0.40% 0.65% Cumulative default 0.10 0.350 _____ _____