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The Duration Of A Soon To Be Approved Loan Of $10 Million Is Four Years The 99th Percentile Increase In Risk

Question

The duration of a soon to be approved loan of $10 million is four years. The 99th percentile increase in risk

premium for bonds belonging to the same risk category of the loan has been estimated to be 5.5%. The current average level of interest rates for this category of bonds is 12%. If the fee income on this loan is 0.4% and the spread over the cost of funds to the bank is 1%, calculate the estimated RAROC of this loan.

Finance