Suppose There Were Two Factors Influencing The Past Default Behavior Of Borrowers The Leverage Or Debt Assets Ratio D 1 (44.92 KiB) Viewed 18 times
Suppose There Were Two Factors Influencing The Past Default Behavior Of Borrowers The Leverage Or Debt Assets Ratio D 2 (45.33 KiB) Viewed 18 times
Suppose there were two factors influencing the past default behavior of borrowers: the leverage or debt-assets ratio (D/A) and the profit margin ratio (PM). Based on past default (repayment) experience, the linear probability model is estimated as: PD;= 0.105(D/A); -0.35(PM); Prospective borrower A has a D/A = 0.65 and a PM = 5%, and prospective borrower B has a D/A = 0.45 and PM = 1%. Calculate the prospective borrowers' expected probabilities of default (PD;). OPD(A) = 4.375%; PD (B) = 4.375% O PD(A) = 4.375%; PD(B) = 5.075% O PD(A) = 5.075%; PD(B) = 5.075% O PD(A) = 5.075%; PD (B) = 4.375%
Assume the same information as in the previous question. From a lender's perspective, which borrower is the better loan candidate? Explain your answer. O Prospective borrower A is the letter loan candidate due to the lower expected probability of default and and higher leverage. O Prospective borrower B is the letter loan candidate due to the higher expected probability of default and lower leverage. O Prospective borrower B is the letter loan candidate due to the lower expected probability of default and lower leverage. O Prospective borrower A is the letter loan candidate due to the higher expected probability of default and and higher leverage.
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