Question 10 1 pts An FI wants to evaluate the credit risk of a $5 million loan with a duration of 4.63 years to a AAA borrower. There are currently 500 publicly traded bonds in that class (i.e., bonds issued by firms with a AAA rating). The current average level of rates (R) on AAA bonds is 8 percent. The largest increase in credit risk premiums on AAA loans, the 99 percent worst-case scenario, over the last year was equal to 1.2 percent (i.e., only 6 bonds out of 500 had risk premium increases exceeding the 99 percent worst case). The projected (one-year) spread on the loan is 0.3 percent and the FI charges 0.26 percent of the face value of the loan in fees. Calculate the capital at risk and the RAROC on this loan. Convert your answer to percentage format. Enter your answer rounded to 2 decimals, and without any units. So, for example, if your answer is 3.4568%, then just enter 3.46. Question 11 A bank is planning to make a loan of $5,000,000 to a firm in the steel industry. It expects to charge a servicing fee of 50 basis points. The loan has a maturity of 8 years with a duration of 7.5 years. The cost of funds (the RAROC benchmark) for the bank is 10 percent. The bank has estimated the maximum change in the risk premium on the steel manufacturing sector to be approximately 4.2 percent, based on two years of historical data. The current market interest rate for loans in this sector is 12 percent. (1) Using the RAROC model, determine whether the bank should make the loan? Note: Spread = expected interest rate (e.g., current market interest rate for loans) - cost of funds O RAROC = 8.9%; Bank should not make the loan. O RAROC = 8.9%; Bank should make the loan. O RAROC = 7.94%; Bank should make the loan. O RAROC = 7.94%; Bank should not make the loan. 1 pts RAROC 16.71%; Bank should make the loan. Question 10 1 pts An FI wants to evaluate the credit risk of a $5 million loan with a duration of 4.63 years to a AAA borrower. There are currently 500 publicly traded bonds in that class (i.e., bonds issued by firms with a AAA rating). The current average level of rates (R) on AAA bonds is 8 percent. The largest increase in credit risk premiums on AAA loans, the 99 percent worst-case scenario, over the last year was equal to 1.2 percent (i.e., only 6 bonds out of 500 had risk premium increases exceeding the 99 percent worst case). The projected (one-year) spread on the loan is 0.3 percent and the FI charges 0.26 percent of the face value of the loan in fees. Calculate the capital at risk and the RAROC on this loan. Convert your answer to percentage format. Enter your answer rounded to 2 decimals, and without any units. So, for example, if your answer is 3.4568%, then just enter 3.46. Question 11 A bank is planning to make a loan of $5,000,000 to a firm in the steel industry. It expects to charge a servicing fee of 50 basis points. The loan has a maturity of 8 years with a duration of 7.5 years. The cost of funds (the RAROC benchmark) for the bank is 10 percent. The bank has estimated the maximum change in the risk premium on the steel manufacturing sector to be approximately 4.2 percent, based on two years of historical data. The current market interest rate for loans in this sector is 12 percent. (1) Using the RAROC model, determine whether the bank should make the loan? Note: Spread = expected interest rate (e.g., current market interest rate for loans) - cost of funds O RAROC = 8.9%; Bank should not make the loan. O RAROC = 8.9%; Bank should make the loan. O RAROC = 7.94%; Bank should make the loan. O RAROC = 7.94%; Bank should not make the loan. 1 pts RAROC 16.71%; Bank should make the loan
