Typo in page 6 of the Credit Risk Study notes - expected return on a loan?

[sridhar]

Under the warning note starting with "Do not make the mistake to calculate...."

You have:

Rather, the expected return = (1.1)(0.9) = -1%

Should it not be: (1.1)(0.9) - 1 = -1%

If I am the bank providing this loan, how should I interpret the negative 1% return? This is how much it is costing me?

--sridhar

 

[David Harper CFA FRM]

Hi sridhar,

Yes, typo. Should be exactly as you say: (1.1)(0.9) - 1 = -1%
(will fix)

"how should I interpret the negative" - Yes, that it's costing you with a negative return. It's just illustrative, i can't think of why a bank would therefore do it. Rather, you'd raise the margin (m) until your expected return was positive.

David