Question 1.

Assume that the duration of a soon to be approved loan of 11 million is four years. The 99^th percentile increase in risk premium for bonds belonging to the same risk category of the loan has been estimated to be 6 percent. Calculate the capital (loan) risk of the loan assuming the current average level of interest rates for this category of bonds is 11 percent.

b) Work again with the same assumptions of the soon to be approved loan in Question 1. above. Calculate its expected percentage fee income in order for this loan to be approved, assuming the minimum risk-adjusted return on capital acceptable to the bank is 7 percent, what should be its expected percentage fee income in order for it to approve the loan.

Please answer part b only.