5.57 Mortgage companies sometimes have customers default on their loans. To understand the effect thatit can have on the company, they often model the risk of default. In the reduced form model of creditrisk, it is assumed that defaults occur according to a Poisson process with a mean of per year. Fora particular company, A = 10; that is, on average 10 customers default each year.What is the probability that the firm will have more than eight defaults in a given year?bWhat is the probability that the firm will have no defaults during a given year?Given that there has been no default in the first half of the year, what is the probability that therewill be at least eight this year?

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Description: 5.57 Mortgage companies sometimes have customers default on their loans. To understand the effect thatit can have on the company, they often model the risk of default. In the reduced form model of creditrisk, it is assumed that defaults occur accord

Step 1 of 4 We are asked about a Poisson distribution for a company with an average of 10…

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What is the probability that the firm will have more than eight defaults in a given year? What is the probability that the firm will have no defaults during a given year? Given that there has been no default in the first half of the year, what is the probability that there will be at least eight this year?

What is the probability that the firm will have more than eight defaults in a given year? What is the probability that the firm will have no defaults during a given year? Given that there has been no default in the first half of the year, what is the probability that there will be at least eight this year?

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Concept explainers

Contingency Table

A contingency table can be defined as the visual representation of the relationship between two or more categorical variables that can be evaluated and registered. It is a categorical version of the scatterplot, which is used to investigate the linear relationship between two variables. A contingency table is indeed a type of frequency distribution table that displays two variables at the same time.

Binomial Distribution

Binomial is an algebraic expression of the sum or the difference of two terms. Before knowing about binomial distribution, we must know about the binomial theorem.

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5.57 Mortgage companies sometimes have customers default on their loans. To understand the effect that
it can have on the company, they often model the risk of default. In the reduced form model of credit
risk, it is assumed that defaults occur according to a Poisson process with a mean of per year. For
a particular company, A = 10; that is, on average 10 customers default each year.
What is the probability that the firm will have more than eight defaults in a given year?
b
What is the probability that the firm will have no defaults during a given year?
Given that there has been no default in the first half of the year, what is the probability that there
will be at least eight this year?

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