PPT Slide
• loans by and large are not actively transacted
• determined only by comparison for the market prices of financial
instruments that are traded
loan yield = riskfree rate + expected loss premium + risk premium
Expected loss premium – account for the actuarial expectation of loss
– based on the probability of default and the
Risk-premium – compensation for the non-diversifiable loss risk
The market price for non-diversifiable risk bearing can be determined
from the equity and fixed income markets.