Bank Loan Pricing: Funding Cost, Expected Loss, Capital & RAROC

What you'll build

What you will be able to do

Each lab ends with a concrete result that you build yourself and the checker confirms, cell by cell.

• Stack the five building blocks of a loan rate for Kestrel Logistics' $5 million term loan and express the result as a spread over the funding base.
• Build Kestrel's exposure, survival and default probability year by year, add up the lifetime expected loss and turn it into an average yearly EL rate for pricing.
• Measure the unexpected loss of five loans, turn it into economic capital with a given multiplier and price the capital at the hurdle rate.
• Build Kestrel's one-year loan P&L at the client's rate, calculate RAROC and economic profit and decide whether to accept or reprice.
• Turn the RAROC formula around to find the lowest rate Brightwater Clinics can be offered, prove it with a RAROC check and compare it with the client's request.
• Value Brightwater's deposits and cash-management fees, find the relationship minimum loan rate and the relationship RAROC at the client's requested rate.
• Fill a 5 × 4 grid of minimum rates with one mixed-reference formula, look up a quote with INDEX/MATCH and chart the grid.
• Run six loan requests through the same RAROC test, decide which ones the credit committee approves and compare the RAROC of the whole book with the approved part.