Explanation:
First, gather all the information provided: L = €1,000,000 D = 4 years i = 5% (0.05) Δi = 1% (0.01) Commission (f) = 0.2% of the loan value Spread (s) = 0.3% The bank’s cost of capital = 12% Given the data, you’ll need to apply the duration method to calculate the change in the loan’s value due to the interest rate increase and then use the RAROC formula:
Then, calculate the annual revenue from the loan:
Commission = 0.2% × €1,000,000 = €2,000
Spread Revenue = 0.3% × €1,000,000 = €3,000
Total Revenue (excluding expenses and expected losses) = €5,000 Now, calculate RAROC:
The loan is profitable as the RAROC exceeds the bank’s cost of capital.
Ultimate access to all questions.
No comments yet.
Q.6010 A bank has issued a corporate loan of €1,000,000 at an interest rate of 5%. The loan has a duration of 4 years. Due to recent market changes, the bank's risk management team expects an interest rate increase of 1% (0.01). The loan generates a 0.2% commission and the spread between the loan's interest rate and the bank's cost of funds is 0.3%. The bank's cost of capital is 12%. Calculate the RAROC for this loan and determine if it is profitable based on the RAROC value.
A
RAROC = 10.00%, and the loan is not profitable.
B
RAROC = 13.12%, and the loan is profitable.
C
RAROC = 15.55%, and the loan is profitable.
D
RAROC = 8.75%, and the loan is not profitable.