Use the following information to answer the problem(s)below.
Consider two banks.Bank A has 1000 loans outstanding each for $100,000,that it expects to be fully repaid today.Each of Bank A's loans have a 6% probability of default,in which case the bank will receive $0 for each of the defaulting loans.Bank B has 100 loans of $1 million outstanding,which it also expects to be fully repaid today.Each of Bank B's loans have a 5% probability of default,in which case the bank will receive $0 for each of the defaulting loans.The chance of default is independent across all the loans.
-The expected overall payoff to Bank B is:
A)$5,000,000.
B)$6,000,000.
C)$94,000,000.
D)$95,000,000.

Question

Quizplus · Accepted Answer

The expected payoff to Bank B is the sum of the expected payoffs from each of its loans. The expected payoff from each loan is $1 million times the probability of repayment (1 - 0.05) = $950,000. Therefore, the expected overall payoff to Bank B is 100 * $950,000 = $95,000,000.

Use the Following Information to Answer the Problem(s)below