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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
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 ofmortgages,66%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. Expected Loss equals PD times EAD times LGD
Expected Loss=PD×EAD×LGD
(a) What is the expected loss on amortgage?
