Question: A single bank is considering two options: First, it can make a$200000 mortgage loan for a customer with a 10 percent probabilityof default, or, second,

A single bank is considering two options: First, it can make a$200000 mortgage loan for a customer with a 10 percent probabilityof default, or, second, it can buy a $200000 security representinga bundle of 100 mortgage loans, which break down as shown in thetable below.

You can calculate the weighted risk for each firm category bymultiplying the percentage of loans represented (for example, thefirst tier includes 25 loans, which is 25/100 = 25% of the total)times the probability of default on loans of thatcategory.

a. Calculate the weighted risk for each type of loan, then addtogether the weighted risks to come up with an overall expecteddefault risk for this financial investment.

Instructions: Round your answers to three decimalplaces.

Number of loans	Probability of default (%)	Weighted risk
25	3	__%
25	12	__%
15	1.5	__%
35	5	__%

b. Adding together the weighted risks, the expected default riskfor the security is ___ percent.

c. If the bank is willing to take on only projects for which thedefault risk is 6 percent or less, it should choose (Click toselect)the single mortgage loanthe bundle of mortgages.

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