Consider two local banks. Bank A has 83 loans outstanding, each for $1.0 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 $83 million outstanding, which it also expects will be repaid today. It also has a 3% probability of not being repaid. Which bank faces less risk? Why? (Select the best choice below.) A. The expected payoff is higher for Bank A, but is riskier. I prefer Bank B. B. The expected payoffs are the same, but Bank A is less risky. I prefer Bank A. C. The expected payoffs are the same, but Bank A is riskier. I prefer Bank B. D. In both cases, the expected loan payoff is the same: $83 million x 0.97 = $80.5 million. Consequently, I don't care which bank I own.

Consider two local banks. Bank A has 83 loans outstanding, each for $1.0 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 $83 million outstanding, which it also expects will be repaid today. It also has a 3% probability of not being repaid. Which bank faces less risk? Why? (Select the best choice below.) A. The expected payoff is higher for Bank A, but is riskier. I prefer Bank B. B. The expected payoffs are the same, but Bank A is less risky. I prefer Bank A. C. The expected payoffs are the same, but Bank A is riskier. I prefer Bank B. D. In both cases, the expected loan payoff is the same: $83 million x 0.97 = $80.5 million. Consequently, I don't care which bank I own.

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

Problem 1PS

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Consider two local banks. Bank A has 81 loans outstanding, each for $1.0 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 $81 million outstanding, which it also expects will be repaid today. It also has a 3% probability of not being repaid. Calculate the following: a. The expected overall payoff of each bank. b. The standard deviation of the overall payoff of each bank. a. The expected overall payoff of each bank. The expected overall payoff of Bank A is $ million. (Round to the nearest integer.) The expected overall payoff of Bank B is $ million. (Round to the nearest integer.) b. The standard deviation of the overall payoff of each bank. The standard deviation of the overall payoff of Bank A is (Round to two decimal places.) The standard deviation of the overall payoff of Bank B is (Round to two decimal places.)
Consider two local banks. Bank A has 77 loans outstanding, each for $1.0 million, that it expects will be repaid today. Each loan has a 4% 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 $77 million outstanding, which it also expects will be repaid today. It also has a 4% probability of not being repaid. Calculate the following: a. The expected overall payoff of each bank. b. The standard deviation of the overall payoff of each bank.
Consider two local banks. Bank A has 92 loans outstanding, each for $1.0 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 $92 million outstanding, which it also expects will be repaid today. It also has a 3% probability of not being repaid. Calculate the following: The expected payoff of Bank A. The expected payoff of Bank B. The standard deviation of the overall payoff of Bank A. The standard deviation of the overall payoff of Bank B.
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.)
Consider two local banks. Bank A has 95 loans outstanding, each for $1.0 million, that it expects will be repaid today. Each loan has a 4% 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 $95 million outstanding, which it also expects will be repaid today. It also has a 4% probability of not being repaid. Which bank faces less risk? Why? A. The expected payoff is higher for Bank A, but is riskier. I prefer Bank B. B. The expected payoffs are the same, but Bank A is less risky. I prefer Bank A. C. In both cases, the expected loan payoff is the same: $95 million×0.96=$91.2 million. Consequently, I don't care which bank I own. D. The expected payoffs are the same, but Bank A is riskier. I prefer Bank B.
Consider two local banks. Bank A has 100 loans outstanding, each for $1.3 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 $130 million outstanding, which it also expects will be repaid today. It also has a 3% probability of not being repaid. Calculate the following: a. The expected overall payoff of each bank. b. The standard deviation of the overall payoff of each bank. a. The expected overall payoff of each bank. The expected overall payoff of Bank A is $ decimal places.) million. (Round to two
Consider two local banks. Bank A has 100 loans outstanding, each for $1.3 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 $130 million outstanding, which it also expects will be repaid today. It also has a 3% probability of not being repaid. Calculate the following: a. The expected overall payoff of each bank. b. The standard deviation of the overall payoff of each bank. a. The expected overall payoff of each bank. The expected overall payoff of Bank A is $☐ million. (Round to two decimal places.)
Two types of borrowers, type A and B, are requesting a loan in the amount of $44,000. Type A repays with prob. 1, while type B repays with prob. 0.76. If a bank cannot observe type, but believes that fraction 0.8 of the borrower pool is type A, then what is the competitive pooling rate the bank can offer these borrowers? 8.7% 7.7% 6.5% 5.0%
A commercial bank is planning to offer Luna a loan in the amount of $15,000 and the bank figures that Luna will repay the loan in full with probability 0.79 and default otherwise. Also, Luna has asked for an interest rate of 12%. In order for the bank to be able to offer this rate, what is the collateral amount that Luna must offer the bank in the event of default? $8,177.5 $8,228.6 $8,366.9 $8,401.1
Tai Credit Corp. wants to earn an effective annual return on its consumer loans of 16.5 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers? Explain why this rate is misleading to an uninformed borrower.
a bank has a commercial loan portfolio of $50 million dollars. based on historic trend analysis it estimatesthat 50% of outstanding principal is not paid back. the bank determines 7% is the optimal interest rate tocharge on consumer loans. Based on the optimal interest rate and the estimate for loan losses what willcharge on its commercial loans to offset its expected loan losses? show your answer to four decimalplaces in a numeric format (if answer is 9.75% enter is .0975).
Bank A pays 5% interest compounded annually on deposits, while Bank B pays 4.25% compounded daily. a. Based on the EAR (or EFF%), which bank should you use? You would choose Bank A because its EAR is higher. You would choose Bank B because its EAR is higher. You would choose Bank A because its nominal interest rate is higher. You would choose Bank B because its nominal interest rate is higher. You are indifferent between the banks and your decision will be based upon which one offers you a gift for opening an account. b. Could your choice of banks be influenced by the fact that you might want to withdraw your funds during the year as opposed to at the end of the year? Assume that your funds must be left on deposit during an entire compounding period in order to receive any interest. If funds must be left on deposit until the end of the compounding period (1 year for Bank A and 1 day for Bank B), and you think there is a high probability that you will make a withdrawal during the…

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