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Basic Question 1 of 3
A mortgage holding company has found that 1% of its mortgage holders default on their mortgages and lose the property. Furthermore, 90% of those who default are late on at least two monthly payments over the life of their mortgage, as compared to 45% of those who do not default.
B. 0.018
C. 0.020
What is the probability that a mortgagee with two or more late monthly payments will default on the mortgage and lose the property?
A. 0.009
B. 0.018
C. 0.020
User Contributed Comments 8
| User | Comment |
|---|---|
| Khadria | The answer is coming "0.0198" but if you round it to 3 decimal places then "D" is I N C O R R E C T |
| bobert | Significant figures. If they are giving you those answers you generally round the furthest one by rule of thumb unless otherwise specified. |
| epizi | Why will you prefer notation P(def) when it is said loss property when defaultie P(L/D). And that is the denominator: P(lose) Therefore P(Lose/Default)=1% P(lose/no Default)=99% P(Default)=90% |
| epizi | P(No Default)=10% P(Lose)=P(Lose/Default)P(def)+P(Lose/noDef)P(no Def) =90%.1%+99%. 45%=0.4545 Bayee P(Def/Loss)=P(Loss/Def).P(Def)/P(lose) =(0.01x0.90)/0.4545=0.020 |
| Beret | Forget about all the formulas like Bayes etc. Just draw a tree diagram to solve all these kind of problems. It works! |
| raymondg | could somebody please work out probability tree thanks |
| farhan92 | @Raymond Probability of Default 1%. Prob of not default = 99% Prob Default and Late =0.9, Prob Def and not late =0.1 Prob non def and late =0,45 so Prob def and late =0.55. |
| ecapocas | Tried it both ways. Tree is definitely easier and better. For me anyway, YMMV. |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
calculate and interpret an updated probability in an investment setting using Bayes' formula
CFA® 2025 Level I Curriculum, Volume 1, Module 4.