(RAROC) Financial institution B wants to evaluate the credit risk of a potential loan to a BBB-rated borrower via the RAROC approach. The contractual loan amount is $0.8 million, the loan spread (loan interest rate minus cost of funding) is 4.6%, the loan fee rate is 0.6%, and operating cost $600. The current market value and the duration of the loan are calculated to be $1 million and 4 years, respectively. The current average yield on BBB-rated bonds is 6%. The change of the yield over the next year is estimated to follow a normal distribution with mean 1% and variance (0.5%)². (a) What is EL according to the duration model? (b) What is the RAROC of this loan with confidence level a
(RAROC) Financial institution B wants to evaluate the credit risk of a potential loan to a BBB-rated borrower via the RAROC approach. The contractual loan amount is $0.8 million, the loan spread (loan interest rate minus cost of funding) is 4.6%, the loan fee rate is 0.6%, and operating cost $600. The current market value and the duration of the loan are calculated to be $1 million and 4 years, respectively. The current average yield on BBB-rated bonds is 6%. The change of the yield over the next year is estimated to follow a normal distribution with mean 1% and variance (0.5%)². (a) What is EL according to the duration model? (b) What is the RAROC of this loan with confidence level a
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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Transcribed Image Text:(RAROC) Financial institution B wants to evaluate the credit risk of a potential
loan to a BBB-rated borrower via the RAROC approach. The contractual loan
amount is $0.8 million, the loan spread (loan interest rate minus cost of funding)
is 4.6%, the loan fee rate is 0.6%, and operating cost $600. The current market
value and the duration of the loan are calculated to be $1 million and 4
years,
respectively. The current average yield on BBB-rated bonds is 6%. The change
of the yield over the next year is estimated to follow a normal distribution with
mean 1% and variance (0.5%)².
(a) What is EL according to the duration model?
(b) What is the RAROC of this loan with confidence level a
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