A single bank is considering two options: First, it can make a $200,000 mortgage loan for a customer with a 10 percent probability of default, or second, it can buy a $200,000 security representing a bundle of 100 mortgage loans, which break down as shown in the table below. You can calculate the weighted risk for each firm category by multiplying the percentage of loans represented (for example, the first tier includes 25 loans, which is 25/100 = 25% of the total) times the probability of default on loans of that category. Instructions: Round your answers to three decimal places. a. Calculate the weighted risk for each type of loan, then add together the weighted risks to come up with an overall expected default risk for this financial investment. Number of Loans 25 25 15 35 Probability of Default (%) 3 12 1.5 5 Weighted Risk N 1%. Adding together the weighted risks, the expected default risk for the security is: b. If the bank is willing to take on only projects for which the default risk is 6% or less, it should choose the (Click to select)
A single bank is considering two options: First, it can make a $200,000 mortgage loan for a customer with a 10 percent probability of default, or second, it can buy a $200,000 security representing a bundle of 100 mortgage loans, which break down as shown in the table below. You can calculate the weighted risk for each firm category by multiplying the percentage of loans represented (for example, the first tier includes 25 loans, which is 25/100 = 25% of the total) times the probability of default on loans of that category. Instructions: Round your answers to three decimal places. a. Calculate the weighted risk for each type of loan, then add together the weighted risks to come up with an overall expected default risk for this financial investment. Number of Loans 25 25 15 35 Probability of Default (%) 3 12 1.5 5 Weighted Risk N 1%. Adding together the weighted risks, the expected default risk for the security is: b. If the bank is willing to take on only projects for which the default risk is 6% or less, it should choose the (Click to select)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text:A single bank is considering two options: First, it can make a $200,000 mortgage loan for a customer with a
10 percent probability of default, or second, it can buy a $200,000 security representing a bundle of 100
mortgage loans, which break down as shown in the table below.
You can calculate the weighted risk for each firm category by multiplying the percentage of loans represented
(for example, the first tier includes 25 loans, which is 25/100 = 25% of the total) times the probability of default
on loans of that category.
Instructions: Round your answers to three decimal places.
a. Calculate the weighted risk for each type of loan, then add together the weighted risks to come up with an
overall expected default risk for this financial investment.
Number of Loans
25
25
15
35
Probability of
Default (%)
3
12
1.5
5
Weighted Risk
%
8
%
1%.
Adding together the weighted risks, the expected default risk for the security is:
b. If the bank is willing to take on only projects for which the default risk is 6% or less, it should choose the
(Click to select)
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 6 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education