Part 1: Problems 5 pts each

1. A bank is planning to make a loan of $45,700,000 to Aerospace. It expects to charge an up-front fee of 0.8 percent and a servicing fee of 108 basis points. The loan has a maturity of 15 years with duration of 10.8 years. The cost of funds (the RAROC benchmark) for the bank is 16.1 percent. Assume the bank has estimated the change in the credit risk premium on the space sector to be approximately 8.2 percent, based on the last 3 months of historical data. The current market interest rate for loans in this sector is 15.2 percent. What is RAROC?

RAROC = __________________

2. In the problem above (1), what should be the up-front fee be in-order for this loan to be approved (or what is the up-front fee of the loan where the bank is indifferent to making the loan)?

Up-front fee = ________________

3. In the problem above (1), what should be the duration be in-order for this loan to be approved (or what is the duration of the loan where the bank is indifferent to making the loan)?

Duration = ________________

4. Suppose the value of your bond portfolio position is $36.3 million and your boss wants to know the DEAR and VAR (value at risk) over the next 6 days. You know that the price volatility is estimated to be 0.0116. What is the dollar expected loss for:

1. the DEAR =__________________________
2. the 6 day VAR = _____________________

5. What is the gross return on a loan if the bank requires the firm to hold 1.4 percent in compensating balances, charges an origination fee of 0.0145 percent, the relevant firms risk premium is 5.2%, the LIBOR is 2.6%, and the reserve requirement is 8%?

The Gross Return on the loan = ___________________