Explanation:
The expected loss formula is:
Expected Loss = Probability of Default × (1 - Recovery Rate)
Given:
We can rearrange the formula to solve for Recovery Rate:
Recovery Rate = 1 - (Expected Loss Rate / Probability of Default)
Substituting the values:
Recovery Rate = 1 - (4.62% / 6.79%)
Recovery Rate = 1 - 0.6804
Recovery Rate = 0.3196 = 31.96% ≈ 32%
Therefore, the correct recovery rate is 32%.
Why other options are incorrect:
Ultimate access to all questions.
An internal auditor at a commercial bank is reviewing the risk management department's credit risk calculations relating to a small business loan in the bank's portfolio. The auditor finds the following information in the calculation:
What recovery rate was assumed by the risk management department in calculating the expected loss?
A
32%
B
47%
C
68%
D
89%
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