See a page
This is what you are actually buying
No competitor shows you a page before you pay — you get a page count and a star rating. This is page 47 of the RSK4804 Integrated Professor's Notes, unedited. Share it with anyone deciding where to buy.
4.3Expected loss on a revolving facility
Expected loss is the amount a lender should provide for in advance, not the loss it fears in a bad year. The three components answer three separate questions — how likely is default, how much will be owed when it happens, and how much of that is unrecoverable — and the maturity adjustment scales the answer for the time the exposure stays open. Each is estimated independently, and a candidate who blends them loses the marks allocated to the separation.
Kgothalo Steel Processors (Pty) Ltd, a steel service centre in Ekurhuleni, has applied to your bank for a revolving working-capital facility. You sit on the credit committee, which has asked for the expected loss to be priced before the facility is approved.
| Item | Figure | Source |
|---|---|---|
| Approved facility limit | R18 000 000 | Credit application, para 4.2 |
| Expected drawn exposure at default | 82% | Bank's internal EAD model |
| One-year probability of default | 2,40% | Grade 6, internal masterscale |
| Loss given default | 45% | Secured on plant, after haircut |
| Maturity adjustment | 1,15 | Basel adjustment at M = 2,5 years |
Required (8)
Calculate the expected loss on the facility, expressed in Rand and as a percentage of the exposure at default.
Step 1 — Establish the exposure the calculation runs on
The limit is not the exposure. A revolving facility is drawn in part, so the exposure at default is the modelled draw against the approved limit, and every later component is applied to that figure rather than to the limit.
Step 2 — Apply the expected-loss identity
The probability of default, the loss given default and the maturity adjustment are multiplied onto the exposure established in step 1. The maturity factor multiplies forward here because the question asks for expected loss; it divides only when a probability is being backed out of a given expected loss.
Step 3 — Express the answer as a proportion of the exposure
The committee prices in basis points, so the Rand figure is returned to the exposure it was computed from. The limit plays no part in this ratio.
The maturity adjustment is where this question is most often lost. Candidates who have learned the identity as PD × EAD × LGD either omit the factor or, having noticed it in the data, divide by it. Read the requirement: where the expected loss is being computed forward, the adjustment multiplies. It divides only when the expected loss is given and a probability is being recovered from it.
One page of 368. The RSK4804 module runs to 45 documents across notes, solution packs, a revision reference and a formula sheet.
How to read the page
- The question stem — the pale-blue block — is reproduced exactly as it would be set, with its source table and mark allocation. A set question is never parted from its answer.
- Each numbered step is headed by what it does, not by a number alone, and every substitution is shown in its own tinted block, so a marker can follow the method line by line.
- The Professor's Note — the gold-edged block — names the point where candidates most often lose the marks on this question type.
- Every figure is computed in code, never typed. A figure that does not carry through fails the document's build.
Want a page from your own module instead? Ask for a free extract.
Get in touch
Tell us your module
Send the module code and your sitting. We reply with exactly what exists for it today, a free extract from that module, and what it costs.
Students
Name your module code and sitting. You get a free extract from your own module — not a generic brochure — before any payment.
Free extract
A full worked example and a note extract from the module you are sitting, sent the same week you ask.
Employers and professional bodies
In-house governance, risk and internal-audit training, and bulk licensing for staff in part-time postgraduate study.