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

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 14P

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Question

) 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

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