What is the expected payoff of bank loans

Assignment Help Finance Basics
Reference no: EM133056576

Consider two local banks. Bank A has 84 loans outstanding, each for $1 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 $84 million outstanding that it also expects will be repaid today. It also has a 4% probability of not being repaid. Calculate the following

a. What is the expected payoff of each bank's loans?

b. How risky are each bank's loans? What is the standard deviation of the payoff of bank A's portfolio of loans? (Hint: the risk of default is independent across loans, so the variance of the payoff of a 100-loan portfolio is simply 100 times the variance of the payoff of a single loan.) What is the standard deviation of the payoff of bank B's loan? Which bank faces less risk? Why?

a. The expected overall payoff of each bank The expected overall payoff of Bank A is $ million. (Round to the nearest integer.)

Reference no: EM133056576

Questions Cloud

Average beta of the new stocks : 1. Is it possible to construct a portfolio of real-world stocks that has a required return equal to the risk-free rate? Explain.
What is the project payback : Tag Inc. is considering a project that has the following cash flow data. What is the project's payback?
Role of power and influence within leadership : Provide a 250-500 word summary that further explains the role of power and influence within leadership. Which traits do you believe will inspire others?
Implement the strategy using call options : Miranda wants to add 500 shares of Apple common stock to her portfolio this year. She could buy the stock today. However, she is concerned about the risk that t
What is the expected payoff of bank loans : Consider two local banks. Bank A has 84 loans outstanding, each for $1 million, that it expects will be repaid today. Each loan has a 4% probability of default,
Researching few small business administration loan awards : After reviewing relevant areas of the U.S. Small Business Administration website and researching a few Small Business Administration (SBA) Loan awards via the w
What is the horizon value of the interest tax shield : Wilde Software Development has a 10% unlevered cost of equity. Wilde forecasts the following interest expenses, which are expected to grow at a constant 3% rate
Explain the concept of goodwill and its treatment : Explain the concept of Goodwill and its treatment on admission of a new partner. In addition, examine critically the issue raised by the senior partner
Possible combinations between s and b : The expected return of S is 25%, the expected return of B is 20%. The standard deviation of S is 9.22% and the standard deviation of B is 5%

Reviews

Write a Review

Finance Basics Questions & Answers

  Should you leave your financial plan as it is

Assume that you have established a plan to achieve a particular level of wealth in three years, but the economic conditions suddenly cause your existing income.

  What is the family effective marginal tax rate

The purpose of this problem is to determine how effective marginal tax rates arc affected by the itemized deduction and personal exemption phase outs.

  Describe the monetary base

Describe the monetary base and how it is used in carrying out monetary policy?

  Review problem on the growth rate of dividends

Your company is about as risky as the average firm in the industry and just paid a dividend (D0) of $2.5. You expect that the growth rate of dividends.

  Discuss the sales returns and allowance accounts

Discuss the Sales Returns & Allowance Accounts. Where does this account fit under the accounting equation? What is the normal balance (debit or credit). How can this be useful for financial analysis?

  What is the rate of return for an investor

What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 7% coupon and sells the bond one year later for $1,037.19?

  How much was the car

Today you buy a used car. The dealer accepts a down payment of $2,000 and lets you pay $1,900 per year for 5 years. The interest rate on the loan was 6%. How much was the car?

  Organization or shows that we are eco-friendly

What do you think about linking our website to high quality websites that list our organization or shows that we are eco-friendly? Does this help our image?

  Calculate an expected rate of return for company a

An investor identifies three factors affecting the share price of company A. The data with regard to the factors are as follows:

  How big of a loan can you afford

1- You deposit $2000 each year into an account earning 7% interest compounded annually. How much will you have in the account in 15 years?

  What return did stuart earn for each year

Earlier today, Stuart sold 200 shares of stock he owned. He purchased the stock three years ago for $28 per share. Following is a table that shows the market.

  What is the cost of internal common equity if the long-term

the expected dividend is 1.50 for a share of common stock priced at 15. what is the cost of internal common equity if

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd