Suppose there were two factors influencing the past default behavior of borrowers: the leverage or debt–assets ratio ( D / A ) and the profit margin ratio ( PM ).

Based on past default (repayment) experience, the linear probability model is estimated as:

PD D A PM   0.105( / ) 0.35( ) i ii Prospective borrower A has a D / A  0.65 and a PM  5%, and prospective borrower B has a D / A  0.45 and a PM  1%. Calculate the prospective borrowers’ expected probabilities of default ( PDi

). Which borrower is the better loan candidate? Explain your answer.