9. A long time 50-year-old retail customer of a bank (credit cards, car loans & a home mortgage all satisfactorily handled) approaches the bank to request a $150K loan to fund 100% of the costs of launch a new business venture (a restaurant). The customer was employed in the restaurant supply sector for 20 years but lost his job due to a downsizing. He previously owned and operated a restaurant for 2 years. He offers security of his personal guarantee and pledge of the restaurant assets (NRV = $60K). He and wife have PNW of $560K, including a $300K residence with a $60K mortgage from your bank. Your credit hypothesis would be: *

a Decline; too risky a sector & start-ups have no proven track record

b Offer $150K secured by restaurant assets ($60K) and pledge of $90K in liquid assets (cash, stocks, bonds etc.)

c Offer a $100K 5-year term loan based upon i) $65K equity infused into the business as owners capital (bank will lend); ii) pledge of restaurant assets ($50K value) plus 2nd mortgage on home for loans; iii) pledge of key-person life insurance & iv) satisfactory business plan, including cash flow projections

d Approve $150K based obtaining 2 guarantees (husband and wife) secured by 2nd mortgage on the home

10. A loan has a probability of default of 6% and a recovery rate given the collateral security of 60%. Funding costs, net of central bank reserve requirements on deposits, are 5.4%. To achieve target return on shareholder capital (12%), the bank needs a return on earning assets of 1.1%. What interest rate should the bank charge for the loan: *

a 10.7%

b 8.9%

c 6.7%

d 11.9%