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
-If the minimum RAROC acceptable to the bank is 8 percent, what should be its expected percentage fee income in order for it to approve the loan?

Question

Quizplus · Accepted Answer

The expected percentage fee income should cover the minimum RAROC of 8% plus the 99th percentile increase in risk premium of 5.5%, totaling 13.5%. The fee income is calculated as (13.5% * 4 years) = 54%. To convert this to a percentage of the loan amount, divide by the loan amount and multiply by 100, resulting in approximately 571%.

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