Q$.$ No$.4$

$($i$)$ A borrower wants to buy a house for $$500,000.$ The lender, that is$,$ the bank, funds $80\%$ of

the purchase. By now, the borrower has repaid $$40,000,$ assume that there is empirical evidence

that one in four homeowners have defaulted in previous years. If the borrower defaults, the bank

can sell the house immediately for $$342,000$ and recover the same, calculate the expected loss

for the bank. $(5$ marks$)$

$($ii$)$ Discuss $($a$)$ Systemic Risk $($b$)$ Liquidity Risk $($related to financial institutions$)(5$ marks$)$