Question .

Historically a bank expects about 5% of its borrowers to default (not repay). The bank currently has 250 loans outstanding.

(a) In order to use a binomial model to compute the probabilities associated with defaults, what must the bank assume about the behavior of these borrowers?

(b) Do the necessary assumptions listed in part (a) appear reasonable in the context of this problem?

(c) The bank has reserves on hand to cover losses if 25 of these loans were to default. Will these reserves will be enough?