Bank A has 100 loans outstanding, each for $1 million, that it expects will be

Business & Finance
Tutor: None Selected Time limit: 1 Day

repaid today. Bank B has only one loan of $100 million outstanding, which it also expects will be repaid today. Each loan has a 5% probability in case they default. Explain the difference between the risk of each bank.

 
Mar 23rd, 2015

The expected payoffs are the same, but bank A is less risky. 


Mar 23rd, 2015

but why?

Mar 23rd, 2015

Okay...

If suppose one loan of each default !!!

Bank TWO  will be completely exhausted !!

But bank ONE will still sustain !!

Hence the trade off will be adjusted if even a few loans default for bank ONE but bank TWO will loose its sustainability !!!


Mar 23rd, 2015

Did you know? You can earn $20 for every friend you invite to Studypool!
Click here to
Refer a Friend
...
Mar 23rd, 2015
...
Mar 23rd, 2015
Dec 6th, 2016
check_circle
Mark as Final Answer
check_circle
Unmark as Final Answer
check_circle
Final Answer

Secure Information

Content will be erased after question is completed.

check_circle
Final Answer