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Consider a company which borrow 10billion yen from a bank. In their plan, the company will return 11billion yen in 5 years at once, where
Consider a company which borrow 10billion yen from a bank. In their plan, the company will return 11billion yen in 5 years at once, where for simplicity we assume that the interest rate is zero. The possibility that the company goes bankrupt by 5 years after is 20%. And, the recovery rate is a random variable which follows the uniform distribution on [0, 1], where the recovery rate and the default indicator are independent of each other.
(i) Calculate expected loss.
(ii) Calculate unexpected loss
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