Explanation:
The lender's expected loss is calculated as follows:
EL = exposure × PD × LR
EL = $4,000,000 × 0.03 × 0.45
EL = $54,000
(Book 4, Module 52.1, LO 52.c)
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Question 61
Suppose a lender has issued a loan commitment of $5 million of which $4 million is currently outstanding. The lender's CRO has assessed a 3% probability of default (PD) and 45% loss rate (LR) to the loan according to its internal credit rating classification process. What is the expected loss for the lender?
A
$54,000.
B
$67,500.
C
$120,000.
D
$150,000.
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