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Explanation:
Loan Details
Calculations
First, calculate the change in the loan's value (ΔL) due to the interest rate change using the duration method:
Next, calculate the loan revenues: Spread Revenue = 7% × €750,000 = €52,500 Total Gross Revenue = €52,500 + €1,125 = €53,625 Net Income Before Tax = Total Gross Revenue - Operating Costs - Expected Losses = €53,625 - €5,000 - €10,000 = €38,625 Net Income After Tax = €38,625 × (1 - 0.30) = €27,037.5
Calculate RAROC:
Since the RAROC (38.57%) exceeds the bank's cost of capital (20%), the loan is profitable.
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Q.6011 A financial analyst is calculating the RAROC for a commercial loan to determine its profitability. The loan amount is €750,000, with an interest rate of 7%, and it has a remaining duration of 10 years. The spread between the loan's interest rate and the bank's cost of funds is also 7%. The bank anticipates an interest rate hike of 1% (0.01). The loan has associated operating costs of €5,000, expected losses of €10,000, and the bank earns a fee of 0.15% on the loan amount. If the bank's cost of capital is 20% and is subject to taxation at a rate of 30%, what is the RAROC for this loan, and is it profitable?
A
RAROC = 38.57%, the loan is profitable.
B
RAROC = 15.75%, the loan is not profitable.
C
RAROC = 26.50%, the loan is profitable.
D
RAROC = 37.28%, the loan is profitable.