Scenario 2 Suppose A Financial Institution Uses A Loan Base Rate Of 6 55 And Sets The Credit Risk Premium At 7 35 Th 1 (67.66 KiB) Viewed 107 times
Scenario 2 Suppose A Financial Institution Uses A Loan Base Rate Of 6 55 And Sets The Credit Risk Premium At 7 35 Th 2 (65.64 KiB) Viewed 107 times
Scenario 2: Suppose a financial institution uses a loan base rate of 6.55% and sets the credit risk premium at 7.35%. The institution charges a 2.90% loan origination fee and imposes 2.65% compensating balances. The required reserves for this institution are 8%. Additionally suppose your institution specifies the following linear probability model to estimate the probability of default: PD = Bo + B, Number of Prior De faults – B2 Income - B3 Credit Score Bo = 1518 Bi = 0.90 B2 = 0.05 B3 = 0.04 What is the gross rate of return on the loan? O 17.22% 13.90% 16.80% 19.45%
Scenario 2: Suppose a financial institution uses a loan base rate of 6.55% and sets the credit risk premium at 7.35%. The institution charges a 2.90% loan origination fee and imposes 2.65% compensating balances. The required reserves for this institution are 8%. Additionally suppose your institution specifies the following linear probability model to estimate the probability of default: PD = Bo + Bi Number of Prior De faults - B2Income - BzCredit Score - Bo = 1518 Bi = 0.90 B2 = 0.05 Bz = 0.04 If a customer has a current income of $30,000, a credit score of 490, and 2 prior defaults, then what is their probability of default using the linear probability model? 0 -3.4 O 0.80 O 0.36 O 0.20
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