1.An FI has a loan portfolio of 10 000 loans of $10 000 each. The loans have a historical average default rate of 4 per cent and the severity of loss is 40 cents per $1.

Over the next year, what are the probabilities of having default rates of 2, 3, 4, 5 and 8 per cent?

What would be the dollar loss on the portfolios with default rates of 4 and 8 per cent?

How much capital would need to be reserved to meet the 1 per cent worst-case loss scenario? What proportion of the portfolio’s value would this capital reserve be? LO 11.4