A customer approached a bank for a $50, 000 loan at 12% interest annu-ally. If thebank does not approve the loan, the bank will invest its $50, 000 to bonds with a 6%return annually. There are two types of customers, good and bad. Good customers neverdefault and bad customer will default. By past experience, the bank knows that 4% ofcustomers are bad, in which case the bank loses the entire $50, 000.Suppose the bank can cost $500 to run a credit check to get favorable or unfavorablerecommendation, such that77P(favorable rec.good customer)961P(favorable rec.|bad customer) =4(Good customers are more likely to get a good rec., but there may still be errors.)1. Suppose the bank purchases the credit check service. Should the bank follow therecommendation?2. What should the bank do to maximize expected profit? 1. Grant the loan directly.2. Reject the loan directly. 3. Pay $500 to rum credit check and decide accordingto whether a favorable recommendation is received.3. What is the bank's maximum willingness to pay for the credit check service?

1)GivenThe loan amount =$50,000Annual interest rate on loan =12%Annual returns on the bond =6% The…

Answered: A customer approached a bank for a $50,…

A First Course in Probability (10th Edition)

10th Edition

ISBN:9780134753119

Author:Sheldon Ross

Publisher:Sheldon Ross

Chapter1: Combinatorial Analysis

Section: Chapter Questions

Problem 1.1P: a. How many different 7-place license plates are possible if the first 2 places are for letters and...

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Suppose a risk neutral agent has $100,000 today that he wants to save for one year. Compare the following three savings plans. Bank A offers a standard savings account with 4.2% p.a. (per annum). Bank B offers the following alternative: There is a basis interest rate of 1% p.a. and 40% participation on the performance of the S&P500. The maximum interest rate is capped at 10% p.a. (If the S&P increases by 4%, there is a bonus of 1.6% so that the total return is 2.6% p.a. If the return of the S&P is 30%, the plan has a total return of 10%. Note, if the S&P has a negative return, the interest rate remains at 1%.) Bank C offers the following alternative: There is a basis interest rate of 2.8% p.a. and 20% participation on the performance of the S&P500. The maximum interest rate is capped at 8% p.a. Suppose the S&P has 1000 points at t=0. At t=1 it can have {900, 990, 1000, 1020, 1030, 1040, 1100, 1200, 1300, 1400} points with equal probability. (a) Draw the payoff…
Assume that the U.S. interest rate is 5%, the European interest rate is 3%, and the future expected exchange rate in one year is $1.224. If the spot rate is $1.24, then the expected dollar depreciation is: -1.3%. 1.3% 0.3%. -3%.
The following options are available for a mortgage: [Option 1] 30-year mortgage with monthly payments of $1818.60. [Option 2] 15-year mortgage with monthly payments of $2879.21. How much will you save overall (for the term of the mortgage) by choosing Option 2 (the shorter loan) compared to Option 1?
(32) With a $30,000 annual income, what would be the value of the loan contracts demanded if a household chose to save 10% of its income and put three-quarters of it into cash balances?
A business lady is wondering whether to invest OMR10,000 in buying bonds at Muscat Security Market (MSM) or put it in a fixed deposit account in Sohar bank at an interest rate of 9%. For the MSM, if the market is good, she believes that she could get a 14% return on her money. With a fair market, she expects to get an 8% return. If the market is bad, she will most likely get no return, i.e., the return would be 0%. She estimates that the probability of a good market is 0.4, the probability of a fair market is 0.4, and the probability of a bad market is 0.2, and she wishes to maximize her long-run average return. a. Develop a decision/payoff table for this problem. b. What is the best decision? c. Calculate the expected value of perfect information and interpret the result. d. The business lady is thinking about paying for a financial advising company that could predict very accurately whether the market would be good, fair, or bad. Advise the business lady on the maximum amount of…
Suppose that in the effort to retain nurses, a hospital in Ohio considers offering an annual raise to the full-time nurses. Assume that the typical nurse stays with the hospital for 5 years, currently makes $1,500 a week and would be able to make $5200 week as a travelling nurse for the next 12 weeks (with no additional expenses and with the possibility to go back to the regular work at $1,500 immediately after that). If nurses discount future at 2% a year, what should be the raise to induce the nurse to stay with the hospital?
Success, Inc. enters into a financial arrangement in which it agrees to pay $100,000 today and $101,000 two years from now in exchange for $200,000 one year from now. Show that there is no yield rate that can be assigned to this two-year transaction.
For the past two years, Monroe Corporation’s statement of cash flows has shown net cash provided by investing activities. Which of the following choices could explain this result? (a) Collection of accounts receivable balances (b) Sales of factory equipment (c) Receipt of cash dividends from investments in other company’s stock (d) Issuance of long-term debt
32) Harry had an unpaid balance of $2481.23 on his credit card statement at thebeginning of April. He made a payment of $155.00 during the month, andmade purchases of $33.92. If the interest rate on Harry's credit card was 17%per month on the unpaid balance, find his finance charge and the new balanceon May 1.
Sapling Independent is a small bank located in Hong Kong. Sapling Independent is interested in increasing the number of mortgages it writes, but it is constrained by how many deposits it has. It has decided to borrow 12,000,000 euros from a large German bank for one year. The German bank is going to charge Sapling Independent an interest rate of 2.5%per year. The German bank insists on being repaid in euros. After Sapling Independent borrows the money, it is going to have to convert the money into Hong Kong dollars at an exchange rate of 11.5 HK dollars/euro.11.5 HK dollars/euro. Then, Sapling Independent is going to lend all the money at an interest rate of 7.0% per year. At the end of one year, all the money that Sapling Independent lent will be repaid, plus interest. Finally, at the end of one year, Sapling Independent is going to have to repay its loan to the German bank in euros. At the end of the year, the exchange rate is 10.0 HK dollars/euro.10.0 HK dollars/euro. What is…
. Suppose Calvin Cordozar Broadus, Jr. (aka Snoop Doggy Dogg) is considering moving his family to Manhattan. His real s managed to locate a penthouse apartment that overlooks Central Park for $2.4 million. He will have $2.1 million from urrent home as a down payment. Snoop would like to finance the remainder of the cost and his banker has presented O-year fixed-rate mortgage at 8% or a 20-year fixed-rate mortgage at 7.5%. monthly mortgage payment for the 30-year loan. indredths place)
ISEM Power is considering the acquisition a local Waste-to-Energy plant which produces electricity for the energy market by burning wastes collected from the community. The investment will cost the company an initial cost of $32 million which will be funded by taking a 5-year bank loan at an interest rate of 10% per year. The loan will be repaid with 5 equal end-of-year payments. Annual profits from the sales of electricity generated by the plant to the power grid are estimated to be $4 million in year 1 to year 10, and $6 million in year 11 to year 20. All cash flows are assumed to occur at the end of each year. The plant has a useful life of 20 years with a salvage value of $1 million. The company MARR is 12%. qns: What is the MIRR of the project if the financing rate is 10% and the reinvestment rate is 12%?

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