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 (1) 3 12 1.5 5 Weighted Risk 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) bundle of mortgages single mortgage loan

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 (1) 3 12 1.5 5 Weighted Risk 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) bundle of mortgages single mortgage loan

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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