Homework: Homework Chap 15: Confidence Intervals Save Score: 0.25 of 1 pt 8 of 8
ID: 3368398 • Letter: H
Question
Homework: Homework Chap 15: Confidence Intervals Save Score: 0.25 of 1 pt 8 of 8 (8 complete) ? HW Score: 87.5%, 7 of 8 pts 15.1.33 Question Help 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, 7% of the borrowers are expected to default. The face value of these mortgages averages $280,000. On average, the bank recovers 70% of the mortgaged amount if the borrower defaults by selling the property. Complete a through c below Expected Loss = PD × EAD × LGD (a) What is the expected loss on a mortgage? Expected loss $ 5880 (Type an integer or a decimal.) (b) Each stated characteristic is a sample estimate. The 95% confidence intervals are [0.04 to 0.081 for PD. [$250,000 to $310,000] for EAD, and [0.29 to 0.391 for LGD What effect does this uncertainty have on the expected loss? Select the correct choice below and, if necessary, fill in the answer box to complete your choice A. The expected loss becomes $ . (Type an integer or a decimal.) The expected loss becomes the interval L$ 2,900 and $ 9,672?(Type integers or decimals ) Xc. This has no effect on the expected loss since all the sample estimates are within their respective intervals (c) What can be said about the coverage of the range implied by combining these intervals? Select the correct choice below and, if necessary, fill in the answer box to complete your choice O A. The range has coverage of between a(Type integers or decimals.) B. The range has coverage of at least 0.85. (Type an integer or a decimal.) xc. Nothing can be said about the coverage of the range Question is complete. Tap on the red indicators to see incorrect answers All parts showing Similar QuestionExplanation / Answer
b)
Interval lower value
= PD low * EAD low * LGD low
= 0.04*250000*0.29
= 2900
Interval upper value
= PD high * EAD high * LGD high
= 0.08*310000*0.39
= 9672
Thus Option B
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