Question

Consider two local banks. Bank A has

100

loans outstanding, each for $1 million, that it expects will be repaid today. Each loan has a

5 %

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

$ 100

million outstanding that it also expects will be repaid today. It also has a

5 %

probability of not being repaid. Calculate the following.

a. What is the expected payoff of each bank's loans?

b. How risky are each bank's loans? What is the standard deviation of the payoff of bank A's portfolio of loans? (Hint: the risk of default is independent across loans, so the variance of the payoff of a 100-loan portfolio is simply 100 times the variance of the payoff of a single loan.) What is the standard deviation of the payoff of bank B's loan? Which bank faces less risk? Why?

Answer #1

**SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP
PLEASE**

1) Consider two local banks. Bank A has 90 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 $90 million?
outstanding, which it also expects will be repaid today. It also
has a 7% probability of not being repaid. Calculate
the?following:
a....

Consider two local banks. Bank A has
96 loans? outstanding, each for?
$1.0 million, that it expects will be repaid today. Each loan has
a
3%
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 $96
million? outstanding, which it also expects will be repaid
today. It also has a 3%
probability of not being repaid. Calculate the? following:
a....

Consider two banks. Bank A has 1000 loans outstanding each for?
$100,000, that it expects to be fully repaid today. Each of Bank?
A's loans have a? 6% probability of? default, in which case the
bank will receive? $0 for each of the defaulting loans. Bank B has
100 loans of? $1 million? outstanding, which it also expects to be
fully repaid today. Each of Bank? B's loans have a? 5% probability
of? default, in which case the bank will...

Consider two local banks. Bank A has 76 loans outstanding, each
for $ 1.0 million, that it expects will be repaid today. Each loan
has a 4 % 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 $ 76 million outstanding,
which it also expects will be repaid today. It also has a 4 %
probability of not being repaid....

(a) Michael Bank has a portfolio which consists of two loans.
The details of the loans are:
Loan 1: amount is $3,000,000, expected return is 10%, and
standard deviation of returns is 10%.
Loan 2: amount is $500,000, expected return is 12%, and standard
deviation of returns is 20%.
The correlation coefficient between the two loans is 0.15. Based
on the Modern Portfolio Theory, compute the expected rate of return
and standard deviation of this loan portfolio.
(b) Explain the...

TCO C) A bank has $125 million in three (3) year loans earning a
fixed rate equal to 6.5%. The assets are funded by $125 million in
liabilities that have a cost of 4.5% and a maturity of 1 year. If
interest rates are projected to fall 100 basis points by next year,
by how much will the bank's profits and NIM change in year 2? Does
this bank face refinancing risk or reinvestment risk? Explain.

A bank has two, 3-year commercial loans with a present value of
$70 million. The first is a $30 million loan that requires a single
payment of $37.8 million in 3 years, with no other payments until
then. The second is for $40 million. It requires an annual interest
payment of $4 million. The principal of $40 million is due in 3
years. The general level of interest rates is 6%. What is the
duration of the bank’s commercial loan...

Suppose that a business line of a bank has a loan book of USD
100 million. The average interest rate is 10%. The book is funded
at a cost of USD 5.5 million. The economic capital against these
loans is USD 7.5 million (7.5% of the loan value) and is invested
in low risk securities earning 5.5% per annum. Operating costs are
USD 1.5 million per annum and the expected loss on this portfolio
is assumed to be 1% per...

A bank has two, 3-year commercial loans with a present value of
$70 million. The first is a $30 million loan that requires a single
payment of $37.8 million in 3 years, with no other payments until
then. The second is for $40 million. It requires an annual interest
payment of $3.6 million. The principal of $40 million is due in 3
years.
What is the duration of the bank’s commercial loan portfolio to
2 decimal places?
What is the...

6. Bank A has chequable deposits of $100 million, vault cash
equalling $1 million and deposits at the Bank of Canada equalling
$14 million. If the desired reserve rate is ten percent what is the
maximum amount Bank A could lend? a. $14 million b. $5 million c.
$4 million d. $90 million
7. Financial intermediaries reduce the problems in lending
associated with information asymmetries by all of the following
except: a. collecting and processing standardized information. b.
screening applicants...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 2 minutes ago

asked 7 minutes ago

asked 14 minutes ago

asked 23 minutes ago

asked 28 minutes ago

asked 32 minutes ago

asked 47 minutes ago

asked 50 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago