please answer 4-7. thank you.
4.) It's possible that a bank, by making a loan to a high-risk borrower, could actually reduce the overall risk of its loan portfolio." Do you agree? Explain. 5.) A bank is considering making a loan with a duration of four years of $10 million at a rate of 12%. The expected net income per dollar is 0.5 cents The 99th percentile increase in risk premium for similar risk bonds has been estimated to be 5.5%. The fee income on this loan is 0.4% and the spread over the cost of funds is 1%. The ROE is 10%. a.) What is the expected net income of the loan? b.) What is the capital (or loan loss) risk? 6.) Bozo Bank makes a loan to Rizzo Razors. It has a base lending rate on loans of 11% and charges a risk premium of 3% on the loan. It does not charge an origination fee, but imposes compensating balances of 10%. Reserve Requirements are 10%, and they do not pay interest. a.) What would be the approximate cost of the loan to Rizzo Razors? b.) What would be the return to the bank? 7.) Tank Bank has allocated its loan portfolio as 65% consumer loans and 35% commercial loans, In contrast, the average bank nationwide has 50% consumer loans and 50% commercial loans. Calculate the standard deviation of Tank Bank's asset allocation proportions relative to the national benchmark. 4.) It's possible that a bank, by making a loan to a high-risk borrower, could actually reduce the overall risk of its loan portfolio." Do you agree? Explain. 5.) A bank is considering making a loan with a duration of four years of $10 million at a rate of 12%. The expected net income per dollar is 0.5 cents The 99th percentile increase in risk premium for similar risk bonds has been estimated to be 5.5%. The fee income on this loan is 0.4% and the spread over the cost of funds is 1%. The ROE is 10%. a.) What is the expected net income of the loan? b.) What is the capital (or loan loss) risk? 6.) Bozo Bank makes a loan to Rizzo Razors. It has a base lending rate on loans of 11% and charges a risk premium of 3% on the loan. It does not charge an origination fee, but imposes compensating balances of 10%. Reserve Requirements are 10%, and they do not pay interest. a.) What would be the approximate cost of the loan to Rizzo Razors? b.) What would be the return to the bank? 7.) Tank Bank has allocated its loan portfolio as 65% consumer loans and 35% commercial loans, In contrast, the average bank nationwide has 50% consumer loans and 50% commercial loans. Calculate the standard deviation of Tank Bank's asset allocation proportions relative to the national benchmark
