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 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 $96 million outstanding, which it also expects will be repaid today. It also has a 7% 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 96 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 $96 million outstanding, which it also expects will be repaid today. It also has a 7% 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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Question B bank B with explanations please
Transcribed Image Text: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 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 $96 million outstanding, which it also
expects will be repaid today. It also has a 7% 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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