Suppose the estimated linear probability model used by an FI to predict business loan applicant default probabilities is
Posted: Sun Jul 03, 2022 12:57 pm
Suppose the estimated linear probability model used by an FI topredict business loan applicant default probabilities is PD =0.03X1 + 0.02X2 -0.05X3 + error, where X1 is theborrower's debt/equity ratio, X2 is the volatilityof borrower earnings, and X3 is the borrower’sprofit margin.
For a particular loan applicant, X1 =0.77, X2 = 0.25, and X3 = 0.10.
a. What is the projected probability of default for theborrower?
b. What is the projected probability ofrepayment if the debt/equity ratio is 4.77?
Note: Convert your answer to percentageformat. Enter your answer rounded to 2 decimals, and without anyunits. So, for example, if your answer is 3.4568%, then just enter3.46.
For a particular loan applicant, X1 =0.77, X2 = 0.25, and X3 = 0.10.
a. What is the projected probability of default for theborrower?
b. What is the projected probability ofrepayment if the debt/equity ratio is 4.77?
Note: Convert your answer to percentageformat. Enter your answer rounded to 2 decimals, and without anyunits. So, for example, if your answer is 3.4568%, then just enter3.46.