Question: 4. risk-adjusted return on capital (30 points) A FI has a cost of funds of 6%. They are considering a loan where the rate is

4. risk-adjusted return on capital (30 points)

A FI has a cost of funds of 6%. They are considering a loan where the rate is 7% and the fees are 0.50%.

The FI believes that in the worst 1% of economic scenarios, the prospective borrower has an 15% chance of default. If a default occurs, the FI would recoup only 15% of the loan.

What is the risk-adjusted return on capital for the FI?

If the FIs ROE requirement is 10%, would the FI make the loan?

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