Which bank faces less risk

Assignment Help Financial Management

Reference no: EM131450048

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.

Reference no: EM131450048

Questions Cloud

What mistake metallgesellschaft make after identify market : Interpret the basis chart with reference to Normal Backwardation and Normal Contango Market. What mistake did Metallgesellschaft make after identifying market?

How would anderson account for the transaction : How would anderson account for the transaction.

Review the case study of crafting a better job : Consider for a moment a midlevel manager at a multinational foods company, Fatima, who would seem to be at the top of her career.

What will the annual savings be : If these funds released by the lockbox arrangement can be invested at 8 percent, what will the annual savings be? Assume the bank fee will be $2,000 per month.

Which bank faces less risk : Consider two local banks. Bank A has 75 loans outstanding, each for $ 1.0 million, that it expects will be repaid today. Which bank faces less risk?

Write an analysis on company which will include statement : write an analysis on the company which will include but is not limited to (1) Financial Statement, (2) Capital Structure (valuation of stock and bonds).

Identifying conflict areas and stakeholder engagement : PPMP20011 Projects Negotiation and Conflict Report - The Projects Negotiation and Conflict Report is a communication tool that is used as the basis for managing negotiation, identifying conflict areas and stakeholder engagement.

What are the three levels of analysis : Let's assume you have been offered a job by Jekyll Corporation, a company in the consumer products industry. The job is in your chosen career path.

Hong kong dollar and the chinese yuan : Hong Kong Dollar and the Chinese Yuan. The Hong Kong dollar has been long been pegged to the U.S. dollar at HK$7.83 / $.

User Account

All Pages