The bank is underwriting an $8,000,000 loan that would be priced at a 10% market rate of interest and include a 0.4% fee. The seven-year loan has a five-year calculated duration. The maximum adverse risk premium for borrowers in the same sector is 3.5%. The spread over the cost of funds (COF) is 1.5%. (1) What is the estimated RAROC on the loan? (2) Is it sufficient if the RAROC benchmark is 12.5%? (3) If not, what would the spread over COF need to be? Also, what would the interest rate need to be to make the deal work? (4) If the bank didnt change the interest rate and only worked with the fee, what would the fee need to be to make the deal work?

RAROC = One Year Net Income On Loan / Loan (Asset) Risk or Capital at Risk

LN= -D_LN x LN x [R/(1+R)]