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.

---

Definitions:

College Education

Refers to the post-secondary education that students receive at universities, colleges, and other institutions, offering degrees and certifications beyond high school education.

Energy-Saving Machine

A type of machinery or device designed to use less energy for the same level of output, contributing to efficiency and reduced environmental impact.

Multiperson Comparisons

Compare one person’s performance with that of others.

Forced Distribution

A performance management system where employees are ranked in groups and a predetermined percentage must fall into each category, often leading to forced rankings.