1 Calculate the Risk Adjusted Return on Capital if the loan
exposure is $50,000, the spread is 3.3%, fees are 1.05%, costs are
$200, Loan Duration is 5 years, and the change in credit risk
premium is 4.1%
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Answer:
Calculation of the Risk-Adjusted Return on capital:
Step 1: Calculate the risk capital
change in credit risk Premium = 4.1%
Loan Amount = $50000
Risk capital = $50000*4.1% = $2050
Step 2: Calculate the One year adjusted income on the loan.
Spread rate= 3.3% i.e $50000*3.3% = 1650
Fees = 1.05% i.e $50000*1.05% = 525
cost = $200
Adjusted inome = $1650+$525-$200 = $1975
Step 3: Calculate the RAROC
The RAROC is calculated by dividing the one-year adjusted net income by the risk capital. i.e $1975/$2050*100=96.34%
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