Consider two local banks. Bank A has 77 loans outstanding, each for $0.8 million, that it expects will be repaid today. Each loan has a 3% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $61.6 million outstanding, which it also expects will be repaid today. It also has a 3% probability of not being repaid. Calculate: a. The expected payoff of Bank A. b. The expected payoff of Bank B. c. The standard deviation of the overall payoff of Bank A. d. The standard deviation of the overall payoff of Bank B. a. The expected payoff of Bank A. The expected payoff of Bank A is $ million. (Round to two decimal places.)

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Consider two local banks. Bank A has 77 loans outstanding, each for $0.8 million, that it expects will be repaid today.
Each loan has a 3% probability of default, in which case the bank is not repaid anything. The chance of default is
independent across all the loans. Bank B has only one loan of $61.6 million outstanding, which it also expects will be
repaid today. It also has a 3% probability of not being repaid. Calculate:
a. The expected payoff of Bank A.
b. The expected payoff of Bank B.
c. The standard deviation of the overall payoff of Bank A.
d. The standard deviation of the overall payoff of Bank B.
a. The expected payoff of Bank A.
The expected payoff of Bank A is $
million. (Round to two decimal places.)
Transcribed Image Text:Consider two local banks. Bank A has 77 loans outstanding, each for $0.8 million, that it expects will be repaid today. Each loan has a 3% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $61.6 million outstanding, which it also expects will be repaid today. It also has a 3% probability of not being repaid. Calculate: a. The expected payoff of Bank A. b. The expected payoff of Bank B. c. The standard deviation of the overall payoff of Bank A. d. The standard deviation of the overall payoff of Bank B. a. The expected payoff of Bank A. The expected payoff of Bank A is $ million. (Round to two decimal places.)
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