Credit reserve equal to your expected credit loss

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Reference no: EM131896592

You have granted an unsecured loan to a company. This loan will be paid off by a single payment of $100 million. The company has a 2% chance of defaulting over the life of the transaction and your calculations indicate that if it defaults you would recover 60% of your loan from the bankruptcy courts. If you are required to hold a credit reserve equal to your expected credit loss, how great a reserve should you hold? i.e. what is the expected credit loss?

Reference no: EM131896592

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