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.
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.
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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![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.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F3ae5aef6-9538-481b-aa90-3bef4413e1c4%2Ffc3bb471-fa0e-456f-b43c-80a0d577995e%2F02iwwkt_processed.png&w=3840&q=75)
Transcribed Image Text: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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