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1 Calculate the Risk Adjusted Return on Capital if the loan exposure is $50,000, the spread...

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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