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Question - A bank is planning to make a loan of $5 000 000 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 estimated 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 per cent.
Required - Given the above information, what is the net interest and fee income the bank earns on this loan?
Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest. How much control does the Fed have over this longer real rate?
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