Prince Edward Bank considers increasing a type of loans in the credit portfolio by $3,500,000, which will generate a gross income of 2.5%p.a. The bank assumes PD is 10% and estimates LGD is 20% and EAD as 80%. The net income, which is gross income minus Expected Loss (i.e. EL), will be used in the RAROC analysis. When doing so, the Bank refers to the net income and unexpected loss (i.e. UL) as the capital-as-risk estimation. Required: If the ROE of Prince Edward Bank is targeted at 25%, analyze whether the loans could be added to the portfolio by RARoC analysis
Prince Edward Bank considers increasing a type of loans in the credit portfolio by $3,500,000, which will generate a gross income of 2.5%p.a. The bank assumes PD is 10% and estimates LGD is 20% and EAD as 80%. The net income, which is gross income minus Expected Loss (i.e. EL), will be used in the RAROC analysis. When doing so, the Bank refers to the net income and unexpected loss (i.e. UL) as the capital-as-risk estimation. Required: If the ROE of Prince Edward Bank is targeted at 25%, analyze whether the loans could be added to the portfolio by RARoC analysis
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
Problem 1PS
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) Prince Edward Bank considers increasing a type of loans in the credit portfolio by $3,500,000,
which will generate a gross income of 2.5%p.a. The bank assumes PD is 10% and estimates LGD
is 20% and EAD as 80%. The net income, which is gross income minus Expected Loss (i.e. EL),
will be used in the RAROC analysis. When doing so, the Bank refers to the net income and
unexpected loss (i.e. UL) as the capital-as-risk estimation.
Required:
If the
to the portfolio by RARoC analysis
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