How great a reserve should hold

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Problem 1: You have granted an unsecured loan to a company. This loan will be paid off by a single payment of $50 million. The company has a 3% 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?

Reference no: EM132736880

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