One of the vice presidents of Acorn Bank is preparing to extend a $1000,000 loan...
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One of the vice presidents of Acorn Bank is preparing to extend a $1000,000 loan to his prime customer. He is proposing to charge a front fee of 0.15% and an additional service fee of 0.05%. The cost of funds for the bank is 6% which is also used as a benchmark for RAROC. The bank is estimating the risk premium for this customer to be 0.10%. The current market rate for such a loan is 6.25%. The loss rate for this category of borrowers is estimated at 5% and the recovery of such loans, should they default, is only 10%. Use the Risk Adjusted Rate On Capital (RAROC) to decide if this loan should be made.
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