Question
The following table shows the details of the two loans made by Bank ABC. By employing the KMV model, compute the return and risk of
The following table shows the details of the two loans made by Bank ABC. By employing the KMV model, compute the return and risk of Bank ABC's overall loan portfolio which is made up of two loans with a correlation coefficient of -0.15.
| Weight | Annual Spread between Loan Rate and Bank's Cost of funds | Annual Fees | Loss to Bank Given Default (LGD) | Expected Default Frequency (EDF) |
Loan 1 | 60% | 2.8% | 1.9% | 25% | 3% |
Loan 2 | 40% | 2.9% | 1.8% | 20% | 2% |
Step by Step Solution
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Step: 1
Using the KMV model we can calculate the return and risk of Bank ABCs overall loan portfolio as foll...
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Microeconomics
Authors: Douglas Bernheim, Michael Whinston
2nd edition
73375853, 978-0073375854
