To determine the bank's expected loss, we need to calculate the expected loss given default (LGD) and then use the annual expected default rate to find the total expected loss.
* Loan Amount (Exposure at Default, EAD): $100,000
* Collateral: $55,000
* Net Exposure (EAD - Collateral): $100,000 - $55,000 = $45,000
* Loss Given Default (LGD): 50% of Net Exposure =50%×$45,000=$22,500LGD
=50%×$45,000=$22,500
* Annual Expected Default Rate: 2%
* Expected Loss: Annual Expected Default Rate × LGD
Expected Loss=2%×$22,500=0.02×22,500=$450Expected Loss=2%×$22,500=0.02×22,500=$450 Hence, the expected loss due to default is $450, but we need to find the total expected loss including the interest, which is typically considered the exposure part.
Total expected loss is primarily focusing on the loan risk and the direct calculation of LGD × Default Rate.