The following formula expresses the expected amount lost when a borrower default

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 of the loan), and LGD is the loss given default (expressed as a decimal). For a certain class of mortgages, 8% of the borrowers are expected to default. The face value of these mortgages averages $260,000. On average, the bank recovers 80% of the mortgaged amount if the borrower defaults by selling the property. Complete a through c below.

Expected Loss equals PD times EAD times LGD

(a) What is the expected loss on a mortgage?

Expected loss = $ (Type an integer or a decimal.)

Explanation / Answer

Hence Expected loss = $ 4160

Probability of Default (PD) 8% Recoverable Loan 80% Loss Given Default (LGD) (100%-80%) 20% Exposure at Default (Face value of loan): (EAD) 260000 Expected Loss ($) Expected Loss = EAD*PD*LGD Expected Loss = 260000*8%*20% 4160

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