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Problem 3 (7 points): Bank wants to lend to business on floating interest rates. The bank is pretty sure that the client does not default, so the bank excludes credit risk. The bank wants to maintain the ratio between equity and risk weighted assets at 12% and wants to keep return on equity at 20%. All Tier1 is share equity. Assume that the bank is only lending to unrated corporate customers. The bank can take loan on Libor flat interest rates. How much has the bank to charge (Libor+ interest rates) for the loan in basis points (bp) per year?
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Answer #1

Risk weighted assets 100.00

Ratio of equity & RWA 12.00%

Equity 12.00

Return of equity 20%

Income required 2.40

Loan volume 100.00

Spread required Libor + 2.40%

Spread in bps Libor + 240.00

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