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An FI wants to evaluate the credit risk of a $2 million loan with a duration of 5.2 years to a AAA borrower. There are currently 500 publicly traded bonds in that class (i.e., bonds issued by firms with a BBB rating). The current average level of rates (R) on BBB bonds is 10 percent. The largest increase in credit risk premiums on BBB loans, the 99 percent worst-case scenario, over the last year was equal to 5.5 percent (i.e., only 6 bonds out of 500 had risk premium increases exceeding the 99 percent worst case). FI charges 0.88 percent of the face value of the loan in fees. The cost of funds (the benchmark ROE) for the FI is 8%. Calculate the RAROC on this loan. Convert your answer to percentage format. Enter your answer rounded to 2 decimals, and without any units. So, for example, if your answer is 3.4568%, then just enter 3.46.

An FI wants to evaluate the credit risk of a $2 million loan with a duration of 5.2 years to a AAA borrower. There are currently 500 publicly traded bonds in that class (i.e., bonds issued by firms with a BBB rating). The current average level of rates (R) on BBB bonds is 10 percent. The largest increase in credit risk premiums on BBB loans, the 99 percent worst-case scenario, over the last year was equal to 5.5 percent (i.e., only 6 bonds out of 500 had risk premium increases exceeding the 99 percent worst case). FI charges 0.88 percent of the face value of the loan in fees. The cost of funds (the benchmark ROE) for the FI is 8%. Calculate the RAROC on this loan. Convert your answer to percentage format. Enter your answer rounded to 2 decimals, and without any units. So, for example, if your answer is 3.4568%, then just enter 3.46.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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An FI wants to evaluate the credit risk of a $2 million loan with a duration of 5.2 years to a AAA borrower. There are currently 500 publicly traded bonds in that class (i.e., bonds issued by firms with a BBB rating). The current average level of rates (R) on BBB bonds is 10 percent. The largest increase in credit risk premiums on BBB loans, the 99 percent worst-case scenario, over the last year was equal to 5.5 percent (i.e., only 6 bonds out of 500 had risk premium increases exceeding the 99 percent worst case). FI charges 0.88 percent of the face value of the loan in fees. The cost of funds (the benchmark ROE) for the FI is 8%. Calculate the RAROC on this loan. Convert your answer to percentage format. Enter your answer rounded to 2 decimals, and without any units. So, for example, if your answer is 3.4568%, then just enter 3.46.
Transcribed Image Text:An FI wants to evaluate the credit risk of a $2 million loan with a duration of 5.2 years to a AAA borrower. There are currently 500 publicly traded bonds in that class (i.e., bonds issued by firms with a BBB rating). The current average level of rates (R) on BBB bonds is 10 percent. The largest increase in credit risk premiums on BBB loans, the 99 percent worst-case scenario, over the last year was equal to 5.5 percent (i.e., only 6 bonds out of 500 had risk premium increases exceeding the 99 percent worst case). FI charges 0.88 percent of the face value of the loan in fees. The cost of funds (the benchmark ROE) for the FI is 8%. Calculate the RAROC on this loan. Convert your answer to percentage format. Enter your answer rounded to 2 decimals, and without any units. So, for example, if your answer is 3.4568%, then just enter 3.46.
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