• BBS bank is planning to make a loan of $4 million to SUNRISE Ltd. It will charge a  service fee of 15 basis points p.a. on the loan which has a duration of 7 years. The estimated maximum change in risk premium in the industry sector of SUNRISE Ltd is 1.8% p.a. while the current market interest rate for the loans to this industry sector is10.9% p.a. The cost of funds for the bank (the RAROC benchmark) is 10% p.a.

  Required

  a) Using the RAROC model, determine whether the bank should make the loan.

  b) What should be the duration for this loan to be approved?

  c) Assuming the duration cannot be changed, how much additional interest and fee income will be necessary to make the loan acceptable?