Suppose a firm has a base lending rate of 5.

Suppose a firm has a base lending rate of 5.0%, an origination fee of 75bpm a compensating balance requirement of 5%, non-interest bearing required reserves of 10% and is willing to loan to a specific customer (with an estimated extreme loss rate of 3.2% and an expected recovery rate of 35%) $50,000,000 at a credit risk premium of 95bp. Compute the ROA and RAROC. Discuss the advantages and disadvantages of each methodology

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