Q4. RAROC (risk-adjusted return on capital) Models (a) What is the essential idea underlying RAROC models? How does the RAROC model relate to the concept of duration? (10 marks) (b) The duration of a soon to be approved loan of $10 million is four years. The 99th percentile increase in risk premium for bonds belonging to the same risk category of the loan has been estimated to be 5.5%. The current average level of interest rates for this category of bonds is 12%. If the fee income on this loan is 0.4% and the spread over the cost of funds to the bank is 1%, calculate the estimated RAROC of this loan