Assume a $500 000 loan has a duration of 2.5 years.The current interest rate level is 10% and a sudden change in the credit premium of 1% is expected.Further assume that the one-year income on the loan is $2500.What is the loan's RAROC (round to two decimals)?

Question

Quizplus · Accepted Answer

RAROC (Risk-Adjusted Return on Capital) is calculated as the income from the loan divided by the economic capital at risk. The income is $2500, and the economic capital at risk is the loan amount ($500,000) multiplied by the change in credit premium (1%), which is $5000. Thus, RAROC = $2500 / $5000 = 0.50 or 50.00%.

Assume a $500 000 Loan Has a Duration of 2