Financial institution is planning to give a loan

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Reference no: EM13927997

Please show work and how you arrived at your conclusion.

The assignment may be submitted as an Excel spreadsheet or an electronic (Word or PDF) document.

A financial institution is planning to give a loan of $5 million to a firm. It expects to charge an up-front fee of 0.20% and a service fee of 5 basis points. The loan has a maturity of 8 years. The cost of funds for the financial institution is 10%.

The FI has estimated a risk premium of 0.15%. The current market interest rates for this type of loan is 10.1%.

The 99th (extreme case) loss rate for borrowers of this type has historically run at 4%.

The dollar proportion of loans of this type that cannot be recaptured on default has historically been 85%.

Using the RAROC model, would you recommend that the FI make this loan? Why?

Reference no: EM13927997

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