1) Consider two local banks. Bank A has 90 loans? outstanding, each for? $1.0 million,...
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1) Consider two local banks. Bank A has 90 loans? outstanding, each for? $1.0 million, that it expects will be repaid today. Each loan has a 7% 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 $90 million? outstanding, which it also expects will be repaid today. It also has a 7% probability of not being repaid. Calculate the?following:
a. The expected overall payoff of each bank.
b. The standard deviation of the overall payoff of each bank.
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2) Consider two local banks. Bank A has 100 loans? outstanding, each for? $1.0 million, that it expects will be repaid today. Each loan has a 5% 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 $100 million? outstanding, which it also expects will be repaid today. It also has a 5% probability of not being repaid. Calculate the? following:
a. The expected overall payoff of each bank.
b. The standard deviation of the overall payoff of each bank.
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