Please Help!! As Soon As Possible Please!

Question

The following formula expresses the expected amount lost when a borrower defaults on a loan where PD is the probability of default on the loan, EAD is the exposure at default(the face value loan) and LGD is the loss given default(expressed as a decimal). For a certain class of mortgages 6% of the borrowers are expected to default the face value of these mortgages averages $260,000 on average, the bank recovers 70% of the mortgaged amount if the borrower defaults by sellingthe property. The expected loss becomes the interval {$_ and $_} I found the expected loss of $4,680, but don't know how to find the intervals. Please help I really need this question tonight

Answer 1

Destiny,

 

You forgot to include the formula, but I can make one up based on logic.

 

Let P_d   = probability that a default and a loss occurs (given as 0.06).

     E_ad = bank's exposure at time of default (given at $260,000.00).

     L_gd = bank's average loss fraction on a default after selling the property (given as 0.30)

     EL  = expected Loss to the bank in dollars of each property defaulted on the average.

 

Then  EL = P_d (E_ad) (L_gd) = 0.06 ($260,000) (0.30) = $ 4,680.00

 

NOTE.  I assume the $260,000 face value figure takes into account the principle paid on the mortgage prior to the default. Otherwise, the bank's loss would be smaller, but no data was given to compute this.