Explanation:
Expected Loss (EL) = Exposure at Default (EAD) × Probability of Default (PD) × Loss Given Default (LGD)
Loan (a):
$100.00 million$100.00 × 0.04 × 0.90 = $3.60 millionLoan (b):
$120.00 million$120.00 × 0.03 × 0.60 = $2.16 millionLoan (c):
$150.00 million$150.00 × 0.02 × 0.60 = $1.80 millionLoan (d):
$200.00 million$200.00 × 0.01 × 0.50 = $1.00 millionComparison:
$3.60 million$2.16 million$1.80 million$1.00 millionLoan (a) has the highest expected loss at $3.60 million.
Ultimate access to all questions.
No comments yet.
| Loan | Remaining Term (in months) | Exposure at default (millions) | One-year Probability of Default (*) | Loss Given Default |
|---|---|---|---|---|
| a. | 3 | $100.00 | 4.00% | 90.0% |
| b. | 6 | $120.00 | 3.00% | 60.0% |
| c. | 9 | $150.00 | 2.00% | 60.0% |
| d. | 12 | $200.00 | 1.00% | 50.0% |
(*) Hazard rate (aka, default intensity) which is by definition continuous, but it is okay to assume discrete as difference is not here material.
Which loan has the highest expected loss in dollar terms?
A
Loan (a)
B
Loan (b)
C
Loan (c)
D
Loan (d)