Financial Risk Manager Part 1

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Explanation:

C is correct. The bank's formula for setting the interest rate on loans is given as:

\text{Interest rate} = \text{Expected loss} + \text{Margin for profit and OpEx} + \text{Funding cost}

Using this formula and the information given:

\text{Expected loss} = 8.18\% - 2.10\% - 4.85\% = 1.23\%

Because

\text{Expected loss} = \text{Probability of default} \times \text{Loss given default}

therefore

\text{Probability of default} = \frac{1.23\%}{(1 - 45\%)} = 2.2364\%

A is incorrect. This multiplies the expected loss by the loss given default instead of dividing.

Explanation:

C is correct. The bank's formula for setting the interest rate on loans is given as:

\text{Interest rate} = \text{Expected loss} + \text{Margin for profit and OpEx} + \text{Funding cost}

Using this formula and the information given:

\text{Expected loss} = 8.18\% - 2.10\% - 4.85\% = 1.23\%

Because

\text{Expected loss} = \text{Probability of default} \times \text{Loss given default}

therefore

\text{Probability of default} = \frac{1.23\%}{(1 - 45\%)} = 2.2364\%

A is incorrect. This multiplies the expected loss by the loss given default instead of dividing.

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Average recovery rate of loans	45%
Margin for profit and operating expenses	2.10%
Average funding cost	4.85%
Average interest rate on loans	8.18%

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Last updated: July 10, 2026 at 05:44

0.68%

1.23%

2.24%

2.73%