
Explanation:
The expected loss is computed as follows:
\text{EL} = \`$2`,500,000 \times 0.02 \times 0.45 = \`$22`,500(Book 1, Module 1.1, LO 1.c)
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Question 99
Suppose Small Bank has booked a loan with the following characteristics: total commitment of $3 million, of which $2.5 million is currently outstanding. The bank has assessed an internal credit rating equivalent to a 2% default probability over the next year. The bank has additionally estimated a 45% loss given default (LGD). What is the expected loss for Small Bank?
A
$22,500.
B
$27,000.
C
$20,250.
D
$15,000.
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