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

a. Over the next year, what are the probabilities of having default rates of 2, 3, 4, 5, and 8 percent?

b. What would be the dollar loss on the portfolios with default rates of 4 and 8 percent?

c. How much capital would need to be reserved to meet the 1 percent worst- case loss scenario? What proportion of the portfolio's value would this capital reserve be?

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