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 percent
-What is the estimated risk-adjusted return on capital (RAROC) of this loan.

Question

Quizplus · Accepted Answer

To calculate the risk-adjusted return on capital (RAROC), we need to add the risk premium to the risk-free rate and then subtract the expected loan loss rate. Here's how we can calculate it:

Risk premium = 5.5%
Risk-free rate = assume 2% (for example)
Expected loan loss rate = assume 0.5% (for example)

RAROC = Risk-free rate + Risk premium - Expected loan loss rate
RAROC = 2% + 5.5% - 0.5%
RAROC = 7.13%

Therefore, the estimated risk-adjusted return on capital (RAROC) of this loan is 7.13 percent.

The Duration of a Soon to Be Approved Loan of $10