Cadigal Bank has compiled the following migration matrix on consumer loans. The higher the risk grade the higher the default risk. If in the most recent year, the bank manager finds that the transition probability from risk grade 1 to 3 is 0.05 and to 4 is 0.06, then the bank manager should take which of the following actions to reduce concentration risk? Risk Grade at End of Year 2 .08 .84 .09 Risk grade at beginning of year 1 2 3 1 .88 .10 .02 Select one: O a. Restrict supply of loans to risk grade 1 borrowers. O b. Increase credit risk premium on risk 3 borrowers. O C. Restrict supply of loans to risk grade 2 borrowers. O d. Increase supply of loans to risk grade 2 borrowers. O e. Increase supply of loans to risk grade 3 borrowers. 3 .02 .03 .78 4 .02 .02 .11

Cadigal Bank has compiled the following migration matrix on consumer loans. The higher the risk grade the higher the default risk. If in the most recent year, the bank manager finds that the transition probability from risk grade 1 to 3 is 0.05 and to 4 is 0.06, then the bank manager should take which of the following actions to reduce concentration risk? Risk Grade at End of Year 2 .08 .84 .09 Risk grade at beginning of year 1 2 3 1 .88 .10 .02 Select one: O a. Restrict supply of loans to risk grade 1 borrowers. O b. Increase credit risk premium on risk 3 borrowers. O C. Restrict supply of loans to risk grade 2 borrowers. O d. Increase supply of loans to risk grade 2 borrowers. O e. Increase supply of loans to risk grade 3 borrowers. 3 .02 .03 .78 4 .02 .02 .11

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 23QTD

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A financial institution uses a loan base rate of 4.35% and sets the credit risk premium at 6.68%. The institution charges a 1.5% loan origination fee and imposes 3.22 % compensating balances. The required reserves for this institution are 10%. Additionally suppose your institution specifies the following linear probability model to estimate the probability of default: PD = Bo - Bi Wealth-B2Credit Score + B3 Number of Bankruptcics Bo = 10, 109.5 %3D B1 = 0.10 %3D B2 = 0.20 %3D B3 = 0.60 %3D Use the information above to answer the question. What is the gross rate of return on the loan? O 9.31% O 11.03% O 12.53% O 12.90%
Optimizing economic agents use the real interest rate when thinking about the economic costs and returns of a loan. Suppose the average rate paid by banks on savings accounts is 0.65% at a time when inflation is around 1.45%. For the average saver, the real rate of interest on his or her savings is %. (Round your response to two decimal places and use a minus sign if necessary.) If banks expect that the rate of inflation in the coming year will be 4.45% and they want a real return of 5.5% on a certain category of loans, then the nominal rate they should charge borrowers on those loans is %. (Round your response to two decimal places. If the economy experiences an unexpectedly high rate of inflation, the group that would tend to benefit is O A. debtors (people or businesses who owe money) O B. creditors (people or institutions that are owed money) O C. both would benefit equally. O D. neither benefits.
Optimizing economic agents use the real interest rate when thinking about the economic costs and returns of a loan. Suppose the average rate paid by banks on savings accounts is 0.45% at a time when infialion is around 0 9% For the average saver, the real rate of interest on his or her savings is % (Round your response to two decimal places and use a minus sign if necessay.) Il banks expect that the rate of inflation in the coming year will be 3.9% and they want a real return of 8% on a certain category of loans, then the nominal rate they should charge borrowers on those loans is %. (Round your response to two decimal places) 11 the economy experiences an unexpectedly high rate of inflation, the group that would tend to benefit is O A. creditors (people or institutions that are owed money). O B. deblors (pcople or businesses who owe moncy). OC. both would benefit cgqually O D. neilher bencfits.
A financial institution uses a loan base rate of 4.35% and sets the credit risk premium at 6.68%. The institution charges a 1.5% loan origination fee and imposes 3.22% compensating balances. The required reserves for this institution are 10%. Additionally suppose your institution specifies the following linear probability model to estimate the probability of default: PD=80-8₁ Wealth - B₂Credit Score + B3 Number of Bankruptcies Bo= 10, 109.5 8₁0.10 B₂ = 0.20 B3 = 0.60 Use the information above to answer the question. What is the gross rate of return on the loan? O 9.31% O 11.03% O 12.53% 12.90%
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