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A bank is planning to make a loan of $10 000 000 to a firm in the mining industry. It expects to charge an up-front fee of 25 basis points and a servicing fee of 25 basis points. The loan has a maturity of 10 years and a duration of 8.5 years. The cost of funds (the RAROC benchmark) for the bank is 8 per cent. Assume the bank has estimated the maximum change in the risk premium on the mining industry to be approximately 3.20 per cent, based on two years of historical data. The current market interest rate for loans in this sector is 9.5 per cent. Using the RAROC model, decide whether the bank should make this loan. Support your lending decision with required calculations.

Reference no: EM133000834

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