TABLE 5
FROM:
Insurers are not Banks: Assessing Liquidity, Efficiency and Solvency Risk Under Alternative Approaches to Capital Adequacy
Paul Kupiec and David Nickerson
BACK TO ARTICLETable 5. Loan pricing and default characteristics
| State | Probability | Par value for project A loan | Par value for project B loan | Payoff on project A loan | Payoff on project B loan |
|---|---|---|---|---|---|
| 1 | 0.05 | 5 | 5 | 1.5 | 4.5 |
| 2 | 0.10 | 5 | 5 | 4 | 5 |
| 3 | 0.20 | 5 | 5 | 5 | 5 |
| 4 | 0.30 | 5 | 5 | 5 | 5 |
| 5 | 0.20 | 5 | 5 | 5 | 5 |
| 6 | 0.10 | 5 | 5 | 5 | 4 |
| 7 | 0.05 | 5 | 5 | 4.5 | 1.5 |
| Market value of loan | 4.70 | 4.70 | |||
| Default option value (% market value) | 6.38 | 6.38 | |||
| Default probability | 0.20 | 0.20 | |||
Loan default distribution and risk-neutral valuation for loans, with a par (maturity) value of 5, made to a firm with either a Type A or Type B project.
