unit 2 assignment 1 3

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Chapter 10

34.The following is a schedule of historical defaults (yearly and cumulative) experienced by an FI manager on a portfolio of commercial and mortgage loans.

Years after Issuance

Loan Type 1 Year 2 Years 3 Years 4 Years 5 Years


Annual default 0.00% _____ 0.50% _____ 0.30%

Cumulative default _____ 0.10% _____ 0.80% _____


Annual default 0.10% 0.25% 0.60% _____ 0.80%

Cumulative default _____ _____ _____ 1.64% _____

Complete the blank spaces in the table.

What are the probabilities that each type of loan will not be in default after five years?

What is the measured difference between the cumulative default (-mortality) rates for commercial and mortgage loans after four years?

Chapter 11

12. A bank vice president is attempting to rank, in terms of the risk-reward trade-off, the loan portfolios of three loan officers. Information on the portfolios is noted below. How would you rank the three portfolios?

Portfolio Expected

Return Standard Deviation

A 10% 8%

B 12 9

C 11 10

13.Suppose that an FI holds two loans with the following characteristics.

Loan Xi Annual Spread between Loan Rate and FI’s Cost of FundsAnnual Fees Lossto FI Given Default Expected Default Frequency

1 0.45 5.5% 2.25% 30% 3.5% ρ12 = −0.15

2 0.55 3.5 1.75 20 1.0

Chapter 15

4. Follow Bank has a $1 million position in a five-year, zero-coupon bond with a face value of $1,402,552. The bond is trading at a yield to maturity of 7.00 percent. The historical mean change in daily yields is 0.0 percent and the standard deviation is 12 basis points.

A. What is the modified duration of the bond?

B. What is the maximum adverse daily yield move given that we desire no more than a 1 percent chance that yield changes will be higher than this maximum?

C. What is the price volatility of this bond?

D. What is the daily earnings at risk for this bond?

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