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In: Finance

Consider two local banks. Bank A has 88 loans​ outstanding, each for​ $1.0 million, that it...

Consider two local banks. Bank A has 88 loans​ outstanding, each for​ $1.0 million, that it expects will be repaid today. Each loan has a 7 % probability of​ default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $ 88 million​ outstanding, which it also expects will be repaid today. It also has a 7 % probability of not being repaid. Calculate the​ following:

a. The expected overall payoff of each bank.

b. The standard deviation of the overall payoff of each bank.

a. The expected overall payoff of each bank.

b. The standard deviation of the overall payoff of each bank.

Solutions

Expert Solution

Given,

Bank A:

No. of loans = 88

Loan amount = $1.0 million or $100000

Bank B:

No. of loans = 1

Loan amount = $88 million or $8800000

Default rate for both banks (d) = 7% or 0.07

Solution :-

jeff jeffy answered 1 year ago
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