Explanation:
The correct answer is D.
Expected loss in year 1 and year 2 can be computed as follows:
Present Value of Expected loss in Year 1 = \frac{\`50 \text{ million} \times 7\% \times 75\% \times 80\%}{(1 + 7.9\%)^{0.5}} = 2.02166$ Present Value of Expected loss in Year 2 = $\frac{\50` \text{ million} \times 9.5\% \times 35\% \times 80\%}{(1 + 7.9\%)^{1.5}} = 1.186641
Total = 3.2083m
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Q.3191 Alpha Microfinance bank has a loan portfolio of $50 million with a maturity of two years. The marginal probabilities of default, exposures at default, and loss rates in each of the two years are as follows:
| Marginal PD | EAD | LR | |
|---|---|---|---|
| Year 1 | 7% | 75% | 80% |
| Year 2 | 9.50% | 35% | 80% |
The internal rate of return, IRR of the loan portfolio is 7.9% and default occurs in the middle of the period.
What is the present value of the expected credit loss of the loan portfolio?
A
$2.5214m
B
$8.5700m
C
$7.7000m
D
$3.2083m
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