7. If the contract rate for a one period loan is 11.65%, the expected recovery in...
7. If the contract rate for a one period loan is 11.65%, the expected recovery in event of default is 20%, and the financial institution requires that the expected return on the loan equal the risk free rate of 3.375%, what is the probability of default on the loan?
Homework Answers
Probability of loss = 1- 20%= 80%
Joint probability of loss and contract rate = 11.65% * 80% = 9.32%
Probability of default = 3.375% / 9.32% = 36.21%
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