Integrated Mini Case LOAN ANALYSIS Which loans should be approved and which rejected? As a senior loan officer at MC Bancorp, you have 1. An AAA-rated, one-year CAI loan from a firm the following loan applications waiting for review, with a liquidity ratio of 2.15, a debc-to-asset ratio The bank uses Altman's Z score, default probabiliof 45 percent, volatility in eamings of 0.13, and ties, mortality rates, and RAROC to assess loan a profit margin of 12 percent. MC Bancorp uses acceptability. The bank's cost of equity (the RAROC a linear probability model to evaluate AAA-rated benchmark) is 9 percent. The bank's loan policy states that the maximum probability of default for loans as follows loans by type is as follows. PD=0.08X1+0.15X2+1.25X30.45X4 where X1=LiquidityratioX2=Debr-to-assetnatioX3=VolatilityinearningsXt=Profitmargin 2. An AA rated, one year C\&I loan from a firm with the followins financial statement informatiols fin. 4. A 52 million, five year loun to a hBB raind corpo ration in the computer pars indusry, MC ian percent. Pused on four yeits of hisencal d corp charges a servicing fee of 75 baus pointe. bank has eatimated the muximum change The duration on the loan is as years. The cont of fick premiuns on the computer parts sisdu funds for the bank (the RAROC benchmark) is B be appewatinutely 55 persent The curred Integrated Mini Case LOAN ANALYSIS Which loans should be approved and which rejected? As a senior loan officer at MC Bancorp, you have 1. An AAA-rated, one-year CAI loan from a firm the following loan applications waiting for review, with a liquidity ratio of 2.15, a debc-to-asset ratio The bank uses Altman's Z score, default probabiliof 45 percent, volatility in eamings of 0.13, and ties, mortality rates, and RAROC to assess loan a profit margin of 12 percent. MC Bancorp uses acceptability. The bank's cost of equity (the RAROC a linear probability model to evaluate AAA-rated benchmark) is 9 percent. The bank's loan policy states that the maximum probability of default for loans as follows loans by type is as follows. PD=0.08X1+0.15X2+1.25X30.45X4 where X1=LiquidityratioX2=Debr-to-assetnatioX3=VolatilityinearningsXt=Profitmargin 2. An AA rated, one year C\&I loan from a firm with the followins financial statement informatiols fin. 4. A 52 million, five year loun to a hBB raind corpo ration in the computer pars indusry, MC ian percent. Pused on four yeits of hisencal d corp charges a servicing fee of 75 baus pointe. bank has eatimated the muximum change The duration on the loan is as years. The cont of fick premiuns on the computer parts sisdu funds for the bank (the RAROC benchmark) is B be appewatinutely 55 persent The curred
