A bank is planning to make a loan of $18,100,000 to Revlon cosmetics. It expects to charge an up-front fee of 0.5 percent and a servicing fee of 82 basis points. The loan has a maturity of 35 years with duration of 20.4 years. The cost of funds (the RAROC benchmark) for the bank is 12.3 percent. Assume the bank has estimated the change in the credit risk premium on the cosmetic sector to be approximately 4.9 percent, based on the last 3 months of historical data. The current market interest rate for loans in this sector is 14.4 percent. What is RAROC?
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A bank is planning to make a loan of $18,100,000 to Revlon cosmetics. It expects to charge an up-fro...
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