Consider two local banks. Bank A has 100 loans outstanding, each for $1.3 million, that it expects will be repaid today. Each loanhas a 3% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all theloans. Bank B has only one loan of $130 million outstanding, which it also expects will be repaid today. It also has a 3% probabilityof 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.The expected overall payoff of Bank A is $☐ million. (Round to two decimal places.)

Expected payoff and standard deviation are important concepts in statistics and finance. They are…

Answered: Consider two local banks. Bank A has…

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

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Ten years ago, you saved $5,000 in bank A that pays a compounding interest rate. You also saved $7,500 in bank B that pays a simple interest rate. Both accounts have $10,000 now. How much will you have in the two accounts at the end of year 10? The account balance in bank A will be $20,000. The account balance in bank B will be $15,000. The account balance in bank A will be $20,000. The account balance in bank B will be $12,500. The account balance in bank A will be $25,000. The account balance in bank B will be $15,000.
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Consider two local banks. Bank A has 87 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 $87 million outstanding, which it also expects will be repaid today. It also has a 3% 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. The expected overall payoff of Bank A is $ million. (Round to the nearest integer.)
Suppose that the First United Bank of America has two loans. Each is due to be repaid one period hence and has independent and identically distributed cash flows. Each loan will repay $300 with a probability of 0.8 and $150 with a probability of 0.2. However, while the bank knows this, the investors cannot distinguish this loan from that of the Third TransAmerica Bank, which has the same number of loans, but will pay $300 with a probability of 0.5 and $150 with a probability of 0.5. There is a prior belief of 0.5 that the First United Bank of America has the higher-valued portfolio. Suppose that the First United wished to securitize these loans, and if it does so without a credit enhancement, the cost of communicating the true value is 7.5% of the true value. Assume that the discount rate is zero and that everybody is risk-neutral. Consider the following securitization scenario. The First United can create two classes of bondholders in a senior- subordinated structure or junior-senior…
1.
Jolly Banker is calculating the loan price for a $500,000 operating loan to Kelly business. If approved, this loan will be funded with 35% equity capital, and the remaining funds will come from the bank's debt capital. You have the following information about your bank’s outlays: Administrative costs 0.45% Cost of debt 7.00% Cost of equity 5.00% Probability of loss 0.55% Fees paid by the borrower 1.00% Calculate the weighted average cost of debt for this funding request. (Enter your answer in percentage. Round your answer to 2 decimal places)
Consider two local banks. Bank A has 77 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 $77 million outstanding, which it also expects will be repaid today. It also has a 4% 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.

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