What is your understanding of loss

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Reference no: EM133715738

QUESTION 1

1 What is your understanding of loss given default (LGD), exposure at default (EAD) and maturity (M). Explain how they are related to expected loss (EL) of a credit asset.

2 Magong Community Bank has a R900 million loan with Sedibelo Construction with a maturity of one year. The probability of default on the loan is 1.85% and the recovery rate is assumed to be 25%. Calculate the expected loss for Magong Community Bank's loan to Sedibelo Construction?

3 Commercial Bank of Ciskei has granted a loan of R19m to Gqeberha Fish Farms, secured by a portfolio of blue-chip shares with a current market value of R26m. As per the policy of the bank, a 50% margin is required on collaterals of equity shares. Provide an appropriate facility grade, assuming Commercial Bank of Ciskei follows the Facility.

4 As Head of Relationship Banking at the Royal Manikaland Bank, you are negotiating pricing with Harare Greater Metro, which insists on an interest rate of 12% on the proposed short-term credit facility. What would the implied PD at this rate be if the one year treasury bill rate is 8%?

Reference no: EM133715738

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