If a default occurs, all losses between 20% and 50% of the principal are equally likely. If the loan does not default, a profit of $0.5 million is made. What is the bank's one-year 99.5% VaR? a. 3.3 million b. 4.2 million C. 4.7 million d. 3.5 million

Calculus For The Life Sciences
2nd Edition
ISBN:9780321964038
Author:GREENWELL, Raymond N., RITCHEY, Nathan P., Lial, Margaret L.
Publisher:GREENWELL, Raymond N., RITCHEY, Nathan P., Lial, Margaret L.
Chapter12: Probability
Section12.CR: Chapter 12 Review
Problem 67CR
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A bank has two $10 million one-year loans. The probabilities of default are as
indicated in the following table.
Outcome
Probability
Neither
loan
defaults
95%
Loan 1
defaults;
Loan 2
does not
default
2.5%
Loan 2
defaults;
Loan 1
does not
default
2.5%
Both
loans
default
0%
If a default occurs, all losses between 20% and 50% of the principal are equally
likely. If the loan does not default, a profit of $0.5 million is made. What is the
bank's one-year 99.5% VaR?
a.
3.3 million
b.
4.2 million
C.
4.7 million
d.
3.5 million
Transcribed Image Text:A bank has two $10 million one-year loans. The probabilities of default are as indicated in the following table. Outcome Probability Neither loan defaults 95% Loan 1 defaults; Loan 2 does not default 2.5% Loan 2 defaults; Loan 1 does not default 2.5% Both loans default 0% If a default occurs, all losses between 20% and 50% of the principal are equally likely. If the loan does not default, a profit of $0.5 million is made. What is the bank's one-year 99.5% VaR? a. 3.3 million b. 4.2 million C. 4.7 million d. 3.5 million
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