Consider an FI That Holds Two Loans with the Following

Multiple Choice

Consider an FI that holds two loans with the following characteristics: $$\begin{array} { | c | c | c | c | c | c | c | } \hline \text { Loan } i & \text { Weight } i & \begin{array} { c } \text { Annual spread between Ioan rate and Fl's } \\\text { cost of funds }\end{array} & \begin{array} { c } \text { Annual fees } \\\text { Loss to Fl given } \\\text { default }\end{array} & \begin{array} { c } \text { Expected default } \\\text { frequency }\end{array} & \\\hline 1 & 0.45 & 3.5 \% & 1.5 \% & 30 \% & 4 \% & P _ { 12 } = - 0.20 \\\hline 2 & 0.55 & 4.5 \% & 2.0 \% & 25 \% & 3 \% & \\\hline\end{array}$$ What is the risk of the loan portfolio (round to two decimals) ?

A) 5.88%
B) 10.01%
C) 3.16%
D) 4.26%