I will upvote immediately if this is answered ASAP.

Suppose that a bank holds two loans with the following characteristics. Spread between Loan Rate and Loan X Bank's Cost of funds Annual Loss to bank Fees given default Expected default frequency 1 10.4 7.5% 1.5% 30% 4% N. 0.6 5.5% 0.5% 20% 3% Note that for each loan, the expected return can be estimated by AIS - (EDF x LGD), and the standard deviation by (EDF (1-EDF))/2 x LGD. The expected return for loan 1 is approximately 7.5% 8.1% O 6.9% O 7.2% 7.8%