Using duration to Estimate Loan Risk

How they find Spread and Fees?

Using Duration to Estimate Loan Risk (Example) Suppose an Fl wants to evaluate the credit risk of a $1 million loan with a duration of 2.7 years to a AAA borrower. Assume there are currently 400 publicly traded bonds in that class (i.e., bonds issued by firms of a rating type similar to that of the borrower). Estimate loan (or capital) risk, assuming that the current average level of rates (R) on AAA bonds is 5 percent. The estimate of loan (or capital) risk, assuming that the current average level of rates (R) on AAA bonds is 5 percent: LN=DLNLN1+RR=(2.7)($1million)(1.050.011)=$28,286 Spread=0.2%$1million=$2,000Fees=0.1%$1million=$3,000$1,000 RAROC=Loanrisk(orcapitalrisk)(LM)One-yearnetincomeonloan=$28,286$3,000=10.61%