A bank is considering a loan applicant for a $12,500,000 6-year loan. The servicing fee is expected to be 42 basis points and the bank's cost of funds, its RAROC benchmark, is 9%. The estimated maximum change in the borrower's risk premium is 3.8%. The loan's duration is 4.73 years and current market interest rates for similar loans is 10%. Based on the RAROC model, should the bank make the loan? Why or why not?

Answer rating: 100% (QA)

To determine whether the bank should make the loan based on the RiskAdjusted Return on Capital RAROC ... View the full answer