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Determine the bank should make the loan

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Reference no: EM132671264

A bank is planning to make a loan of $1,000,000 to a firm with AAA credit rating. It expects to charge a servicing fee of 50 basis points. The loan has a duration of 5 years. The cost of funds (the RAROC benchmark) for the bank is 10 percent. The bank has estimated the maximum increase in the risk premium on AAA rating companies to be approximately 4 percent. The current market interest rate for loans in this rating is 12 percent. Using the RAROC model, determine whether the bank should make the loan.

Reference no: EM132671264

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