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Consider two local banks Bank A has 75 loans outstanding each for $ 10 million that it expects will be repaid today Each loan has a 3 % probability of default in which case the bank is not

Consider two local banks. Bank A has 75 loans? outstanding, each for $ 1.0 ?million, that it expects will be repaid today. Each loan has a 3 % probability of? default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $ 75 million? outstanding, which it also expects will be repaid today. It also has a 3 % probability of not being repaid. Which bank faces less? risk? Why? ?(Select the best choice? below.)

A. The expected payoffs are the? same, but Bank A is riskier. I prefer Bank B.

B. In both cases the expected loan payoff is the? same: $75 million×0.97=$72.8 million. ?Consequently, I? don't care which bank I own.

C. The expected payoffs are the? same, but Bank A is less risky. I prefer Bank A.

D. The expected payoff is higher for Bank? A, but is riskier. I prefer Bank B.

 

Apr 11 2020 View more View Less

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