Question

In: Finance

Assume a Bank has the following loan portfolio: Credit Rating Bank Debt Corporate Debt AAA...

Assume a Bank has the following loan portfolio:

Credit Rating   Bank Debt    Corporate Debt
AAA 10,000,000   5,000,000
A 10,000,000   10,000,000
BBB 10,000,000   5,000,000

Risk weightings for these assets are:

Credit Rating   Bank Debt   Corporate Debt
AAA 20%   20%
A 50%   50%
BBB 50%   100%

What is the Bank's total risk weighted assets?

A. $23,000,000
B. $23,000
C. $400,000
D. $50,000,000

Expert Solution

Correct option is > A. $23,000,000

Total risk weighted asset = Bank debt risk weighted assets + Corporate debt risk weighted assets

Total risk weighted asset = $12,000,000 + $11,000,000

Total risk weighted asset = $23,000,000

WORKING

1.

Bank debt risk weighted asset:

Credit rating	Risk weight	Bank debt
AAA	20%	10,000,000
A	50%	10,000,000
BBB	50%	10,000,000

Bank debt risk weighted asset = 20% x 10000000 + 50% x 10000000 + 50% x 10000000

= $ 12,000,000

2.

Corporate debt risk weighted asset:

Credit rating	Risk weight	Corporate debt
AAA	20%	5,000,000
A	50%	10,000,000
BBB	100%	5,000,000

Corporate debt risk weighted asset = 20% x 5000000 + 50% x 10000000 + 100% x 5000000

= 11,000,000

jeff jeffy answered 2 days ago

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