1. A defined benefit pension plan has expected payouts of $30 million per year for12 years and then $32 million over the following 8 years. Actuaries have estimated that the fund can be expected to earn an average of 4.00% on its assets. The fund currently has reserves of $500,000,000. The plan is under/over funded by about ___________ million.
2. A bank can charge a corporate borrower 5.50% on a loan. The borrower is asking for a $700,000 loan. The extreme loss rate on this loan type is 4.25% and when default occurs, about 10% of the loan amount is recovered. The interest and noninterest cost of the loan is 5.25%.
a) What is the RAROC of the loan?
b) Under what circumstances should the bank make the loan?