Finance Calculate the loan risk associated with a $4 million, five-year loan to a BBB-rated corporation in the computer parts industry that has a duration of 5.8 years. The cost of funds for the bank is 8 per cent. Based on four years of historical data, the bank has estimated the maximum change in the risk premium on the computer parts industry to be approximately 4.0 per cent. The current market rate for loans in this industry is 11 per cent.
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- a) A commercial bank is planning to give a loan of $3,000,000 to a firm. The bank expects to charge an up-front fee of 0.15% and a service fee of 0.04%. The loan has a maturity of 10 years. The cost of funds (and the RAROC benchmark) for the commercial bank is 12%. The commercial bank has estimated the risk premium on the loan to be approximately 0.20%, based on three years of historical data. The current market interest rate for loans in this sector is 12.15%. The 99th (extreme case) loss rate for borrowers of this type has historically run at 4%, and the dollar proportion of loans of this type that cannot be recaptured on default has historically been 85%. The 'bank's Return on Equity (ROE) ratio is 13%. Using the risk-adjusted return on capital (RAROC) model, should the commercial bank make the loan? Please show each step of your calculation.A commercial bank is planning to give a loan of $3,000,000 to a firm. The bank expects to charge an up-front fee of 0.15% and a service fee of 0.04%. The loan has a maturity of 10 years. The cost of funds (and the RAROC benchmark) for the commercial bank is 12%. The commercial bank has estimated the risk premium on the loan to be approximately 0.20%, based on three years of historical data. The current market interest rate for loans in this sector is 12.15%. The 99th (extreme case) loss rate for borrowers of this type has historically run at 4%, and the dollar proportion of loans of this type that cannot be recaptured on default has historically been 85%. The 'bank's Return on Equity (ROE) ratio is 13%. Using the risk-adjusted return on capital (RAROC) model, should the commercial bank make the loan?A bank is planning to make a loan of sh.5,000,000 to a firm in the steel industry. It expects to charge a servicing fee of 50 basis points. The loan has a maturity of 8 years with a duration of 7.5 years. The cost of funds (the RAROC benchmark) for the bank is 10 percent. Assume the bank has estimated the maximum change in the risk premium on the steel manufacturing sector to be approximately 4.2 percent, based on two years of historical data. The current market interest rate for loans in this sector is 12 percent. Required: Using the RAROC model, determine whether the bank should make the loan Kindly calculate without excel.
- A bank is planning to make a loan of sh.5,000,000 to a firm in the steel industry. It expects to charge a servicing fee of 50 basis points. The loan has a maturity of 8 years with a duration of 7.5 years. The cost of funds (the RAROC benchmark) for the bank is 10 percent. Assume the bank has estimated the maximum change in the risk premium on the steel manufacturing sector to be approximately 4.2 percent, based on two years of historical data. The current market interest rate for loans in this sector is 12 percent. Required: Using the RAROC model, determine whether the bank should make the loan.A bank is planning to make a loan of $25,000,000 to a firm in the steel industry. It expects to charge a servicing fee of 50 basis points. The loan has a maturity of 8 years and a duration of 7.5 years. The cost of funds (the RAROC benchmark) for the bank is 10 percent. Assume the bank has estimated the maximum change in the risk premium on the steel manufacturing sector to be approximately 4.2 percent, based on two years of historical data. The current market interest rate for loans in this sector is 12 percent. a. What should be the duration in order for this loan to be approved? b. Assuming that duration cannot be changed, how much additional interest and fee income would be necessary to make the loan acceptable? c. Given the proposed income stream and the negotiated duration, what adjustment in the risk premium would be necessary to make the loan acceptable?A financial manager is considering two possible sources of funds necessary to finance a $10,000,000 investment that will yield $1,500,000 before interest and taxes. Alternative one is a short-term commercial bank loan with an interest rate of 8 percent for one year. The alternative is a five-year term loan with an interest rate of 10 percent. The firm's income tax rate is 30 percent. What are the crucial considerations when selecting between short- and long-term sources of finance?
- A financial manager is considering two possible sources of funds necessary to finance a $10,000,000 investment that will yield $1,500,000 before interest and taxes. Alternative one is a short-term commercial bank loan with an interest rate of 8 percent for one year. The alternative is a five-year term loan with an interest rate of 10 percent. The firm's income tax rate is 30 percent. The financial manager expects short-term rates to rise to 11 percent in the second year. At that time long-term rates will have risen to 12%. What will be the firm's projected earnings under each alternative in the second year?An FI is planning the purchase of a $4 million loan to raise the existing average duration of its assets from 4.8 years to 6.3 years. It currently has total assets worth $20 million, $4 million in cash (0 duration), and $16 million in loans. All the loans are fairly priced. a-1. Assuming it uses the cash to purchase the loan, calculate the duration of the existing loan. a-2. Assuming the FI uses the cash to purchase the loan and that the loan has a 8.3 year duration, calculate the resulting duration of the asset portfolio. a-3. Should it purchase the loan if its duration is 8.3 years?b. What asset duration loans should it purchase in order to raise its average duration to 6.3 years?A financial manager is considering two possible sources of funds necessary to finance a $10,000,000 investment that will yield $1,500,000 before interest and taxes. Alternative one is a short-term commercial bank loan with an interest rate of 8 percent for one year. The alternative is a five-year term loan with an interest rate of 10 percent. The firm's income tax rate is 30 percent. What will be the firm's projected earnings under each alternative for the first year?
- Suppose that you have generated the estimates listed below from a pro forma analysis for a company that had requested a three year loan. The loan is a $1.5 million term loan with the equal annual payments of principals. The P&I payments are due at the end of each year with the annual interest rate = Prime rate + 1.5%. Yr.1 Yr. 2 Yr. 3 Capital expenditure 250,000 125,000 75,000 Cash dividends 140,000 140,000 140,000 Cash flow from operations before interest expense 750,000 780,000 800,000 Assuming the Prime rate = 7.5% each year. What will be the interest payment at year 3? a). 25,000 b). 50,000 c). 45,000 d). 53,000 e). 10,000A financial manager is considering two possible sources of funds necessary to finance a $10,000,000 investment that will yield $1,500,000 before interest and taxes. Alternative one is a short-term commercial bank loan with an interest rate of 8 percent for one year. The alternative is a five-year term loan with an interest rate of 10 percent. The firm's income tax rate is 30 percent. What will be the firm’s projected earnings under each alternative for the first year? The financial manager expects short-term rates to rise to 11 percent in the second year. At that time long-term rates will have risen to 12%. What will be the firm’s projected earnings under each alternative in the second year? What are the crucial considerations when selecting between short- and long-term sources of finance?A bank offers a corporate client a choice between borrowing cash at 9% per annum and borrowing Bitcoin at -5% per annum. The risk-free interest rate is 3% per annum, and storage costs are 7% per annum. The interest rates on the two loans are expressed with annual compounding. The risk-free interest rate and storage costs are expressed with continuous compounding. Suppose that the price of Bitcoin is $58,000 and the corporate client wants to borrow $1,160,000. Discuss whether the rate of interest on the Bitcoin loan is too high or too low in relation to the rate of interest on the cash loan. What is the correct rate of interest for Bitcoin loan?