Question
The Planet Bank receives the following loan proposal from a commercial real estate developer SureToDefault, Inc. Data on Proposed Loan to SureToDefault, Inc.: Expected Outstanding
The Planet Bank receives the following loan proposal from a commercial real estate developer SureToDefault, Inc. Data on Proposed Loan to SureToDefault, Inc.:
Expected Outstanding Loan Amount (EAD): $50,000,000
Probability of Default (PD): 0.5%
Expected Loss given Default (LGD): 40%
Loan Origination Fee: 1%
Interest Margin on Loan: 70 bp (0.70%)
Treasury Capital Charge: 25 bp (0.25%)
Allocation of Overhead: $100,000
What is the expected economic profit from a loan?
Would you accept this proposal? How may your decision change if you consider standalone vs. portfolio risk? Explain.
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