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