QUESTION 6 The APR on a financial security is 12 percent. If the inflation premium is 4 percent and the pure rate is 3 p

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QUESTION 6
The APR on a financial security is 12 percent. If the inflation
premium is 4 percent and the pure rate is 3 percent, what risk
premium is required by the market? b) A bank
wishes to earn a pure rate of 2 percent, and the inflation premium
is 1.6%. The bank uses the Fair Issac Corporation (FICO) score to
determine car loan rate for its customers. Based on an automobile
loan applicant’s FICO score, it uses the following risk premium
adjustment to the rate it quotes.
FICO Score
Risk Premium %
>740
1.00%
720-739
1.10%
700-719
1.30%
680-699
1.60%
660-679
1.90%
640-659
2.20%
620-639
2.50%
<620
7.50%