Question

The bank is planning to make a loan of 5000000 to a firm in the
steel industry. It expects to charge a servicing fee of 50 basis
points. The loan has a maturity of 8 years and a duration of 7.5
years. The cost of funds(the RAROC benchmark)for the bank is 10 per
cent. Assume the bank has astimated the maximum change in the risk
premium on the steel manufacturing sector to be approximately 4.2
per cent, based on two years of historical data. The current market
interest rate for loans in this sector is 12 percent.

1.based on above information. What is the net interest and fee
income the bank earns on the loan?

A.525000

B.155000

C.125000

D.625000

2.using duration. Estimate the loan risk for this loan

A.-525000

B.-1431818

C.-1406250

D.-1281250

3. Estimate the RAROC for thisbloan and whether the bank should
make the loan

A 10.83% should not

B 8.89% should

C 8.89% should not

D 10.83% should

4.assuming the loan does not meet the required criterion under
RAROC model. How can the bank alter the loan so that it can be
approved

A. It can shorten the duration on the loan by shortening the term
of the loan

B. It can increased the servcing fees

C. It can rasie the lending rate on the loan

D. All of above

Answer #1

1. A $2 million, five-year loan to a BBB-rated corporation in
the computer parts industry. MC Bancorp charges a servicing fee of
75 basis points. The duration on the loan is 4.5 years. The cost of
funds for the bank (the RAROC benchmark) is 8 percent. Based on
four years of historical data, the bank has estimated the maximum
change in the risk premium on the computer parts industry to be
approximately 5.5 percent. The current market rate for loans...

A $2 million, five-year loan to a BBB-rated corporation
in the computer parts industry. MC Bancorp charges a servicing fee
of 75 basis points. The duration on the loan is 4.5 years. The cost
of funds for the bank (the RAROC benchmark) is 8 percent. Based on
four years of historical data, the bank has estimated the maximum
change in the risk premium on the computer parts industry to be
approximately 5.5 percent. The current market rate for loans in...

question 3
Your firm seeks to obtain a short-term loan from a local bank.
The banker quotes you a rate of 3%. This is an inflation rate.
Select one:
True
False
question 6
The pure play approach:
Select one:
a. Is most useful when each division makes a multitude of
different products.
b. Is easier to implement than the subjective approach.
c. Can be used to find the cost of capital for a division.
d. Should be used only if...

please show work thank you!!!!!!!
1. Bank of RGV is a successful
regional bank with common equity share outstanding 1 million. It
pays $10 dividend each year and expected to grow 5% in period 1.
The appropriate discount rate to reflect shareholder risk is 10%.
Answer below question using below data pertains to Bank of RGV:
Below numbers are in 1000’s.
Balance
sheet
Income statement
Cash
$100
Interest income
$400
Securities investments
$600
interest expense...

1. Mia Salto wishes to determine how long it will take to repay
a loan with initial proceeds of $5000 where annual end-of-year
installment payments of $650 are required. a. If Mia can borrow at
an annual interest rate of 7 %, how long will it take for her to
repay the loan fully? b. How long will it take if she can borrow at
an annual rate of 6 %? c. How long will it take if she has...

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