Suppose that as a loan officer for a bank you just completed a $1$ million loan to a small business. This is a senior unsecured loan, with one$-$year maturity and carries a $10\%($per annum$)$ interest rate. You rate the borrower internally as B$-,$ which translates into a one$-$year probability of default $($PD$)$ estimate of $10\%.$ Loss given default $($LGD$)$ for the loan is estimated as $30\%.$ The borrowing cost for your bank is $2\%($per annum$).$ Determine the expected profit from the loan at maturity.

Question $5$Answer

a$.$

$47,000$

b$.$

$20,000$

c$.$

$1,067,000$