Assume that B = $200 000, r = 1 year, i = 7 per cent, d = 0.9, N(h₁) = 0.174120 and N(h₂) = 0.793323. Using Moody's KMV Credit Monitor Model, what is the required risk premium on the loan (round to two decimal places)?

Question

Quizplus · Accepted Answer

Using the Moody's KMV Credit Monitor Model, the required risk premium on the loan can be calculated as follows:
PD = 1 - N(hS1U1B0) = 1 - N(0.79287) = 0.212288
LGD = 1 - d = 1 - 0.9 = 0.1
EAD = B
Therefore, the risk premium can be calculated as:
Risk Premium = PD x LGD x (1 + i) / (1 - d)
= 0.212288 x 0.1 x (1 + 0.07) / 0.1
= 1.64%
Therefore, the answer is C.

Assume That B = $200 000, R = 1 Year