Questions and Problems: (Note: students will be responsible for checking each question to make sure it is free of mistakes with regard to numbers and information) Q14) CountrySide Bank uses Moody's Analytics Portfolio Manager to evaluate the risk-return characteristics of the loans in its portfolio. A specific S10 million loan carns 2 percent per year in fees, and the loan is priced at a 4 percent spread over the cost of funds for the bank. Because of collateral considerations, the loss to the bank if the borrower defaults will be 30 percent of the loan's face value. The expected probability of default is 5 percent. What is the anticipated retum on this loan? What is the risk of the loan? Q15) Suppose that an FI holds two loans with the following characteristics. Loan Xi Annual Loss te FIExpected Default Frequency Spread Annual between loan rate Frees and FI's Cost of Funds Given Default I 1 4.0% 2 7 25 2.50% 2.15 3.% 20 4.10 The return on loan I is R, - 6.25%, the risk on loan 2 is o, - 1.8233% and the return of the portfolio is R, - 4.555%. Calculate of the loss give default on loans 1 and 2, the proportions of loans 1 and 2 in the portfolio, and the risk of the portfolio, a, , using Moody's Analytics Portfolio Manager.

Questions and Problems: (Note: students will be responsible for checking each question to make sure it is free of mistakes with regard to numbers and information) Q14) CountrySide Bank uses Moody's Analytics Portfolio Manager to evaluate the risk-return characteristics of the loans in its portfolio. A specific S10 million loan carns 2 percent per year in fees, and the loan is priced at a 4 percent spread over the cost of funds for the bank. Because of collateral considerations, the loss to the bank if the borrower defaults will be 30 percent of the loan's face value. The expected probability of default is 5 percent. What is the anticipated retum on this loan? What is the risk of the loan? Q15) Suppose that an FI holds two loans with the following characteristics. Loan Xi Annual Loss te FIExpected Default Frequency Spread Annual between loan rate Frees and FI's Cost of Funds Given Default I 1 4.0% 2 7 25 2.50% 2.15 3.% 20 4.10 The return on loan I is R, - 6.25%, the risk on loan 2 is o, - 1.8233% and the return of the portfolio is R, - 4.555%. Calculate of the loss give default on loans 1 and 2, the proportions of loans 1 and 2 in the portfolio, and the risk of the portfolio, a, , using Moody's Analytics Portfolio Manager.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter17: The Management Of Cash And Marketable Securities

Section: Chapter Questions

Problem 2P

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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%
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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.
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