A Bank Is Using the RAROC to Evaluate Large Business

question 15

Multiple Choice

A bank is using the RAROC to evaluate large business loans. The benchmark rate of return is 7.55 percent. The one-year loan interest rate is 8.00 percent and the bank must pay 7.40 percent to raise the funds. The cost to service the loan is 0.3 percent. If the loan defaults,92 percent of the money lent will be lost. Based on historical default rates,the extreme worst-case loss scenario is about 5 percent. Should the bank make the loan? Why or why not?

• A)Yes,because the RAROC is 7.11 percent.
• B)No,because the RAROC is 7.11 percent.
• C)Yes,because the RAROC is 6.52 percent.
• D)No,because the RAROC is 6.52 percent.
• E)No,because the RAROC is more than 7.55 percent.

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Definitions:

Recreation Centre

A facility that provides a variety of physical and leisure activities for individuals of all ages, including sports, fitness classes, and educational programs.

Physical Activities

Activities that require bodily movement produced by the contraction of skeletal muscles that substantially increases energy expenditure.

Telephone Responses

The feedback or answers provided through voice calls.

Centers For Disease Control

A national public health institute in the United States, focused on protecting public health and safety through disease control and prevention.