Questions and Problems:

$($Note: students will be responsible for checking each

question to make sure it is free of mistakes with regard to

numbers and information$)$

Q$14)$ CountrySide Bank uses Moody's Analytics Portfolio

Manager to evaluate the risk$-$return characteristics of the loans

in its portfolio. A specific $$10$ million loan earns $2$ percent per

year in fees, and the loan is priced at a $4$ percent spread over

the cost of funds for the bank. Because of collateral

considerations, the loss to the bank if the borrower defaults

will be $20$ percent of the loan's face value. The expected

probability of default is $3$ percent.

What is the anticipated return on this loan? What is the risk of

the loan?

Q$15)$ Suppose that an FI holds two loans with the following

characteristics.

The return on loan $1$ is $R_1=6\mathrm{.}25\%,$ the risk on loan $2$ is ${}_2=$

$1\mathrm{.}8233\%$ and the return of the portfolio is $R_p=4\mathrm{.}555\%.$

Calculate of the loss give default on loans $1$ and $2,$

Calculate the proportions of loans $1$ and $2$ in the portfolio,

Calculate the risk of the portfolio, ${}_p,$ using Moody's

Analytics Portfolio Manager.