QUESTION 3A. CREDIT RISK AND LOAN PRICING

In the context of banks' credit risk management, distinguish between intrinsic risk and concentration risk.

QUESTION 3B. CREDIT RISK AND LOAN PRICING

Derby Bank offers consumer loans with a 5 per cent base rate, charges a 0.25 per cent loan origination fee, imposes a 15 per cent compensating balance requirement and must pay a 5.5 per cent reserve requirement to the central bank. The loans typically are repaid at maturity. Calculate the loan's annual gross return, assuming the risk premium on consumer loans is 1.5 per cent.

You must show all workings.

QUESTION 3C. CREDIT RISK AND LOAN PRICING

Give two (2) examples of "perceived value customers" of commercial banks. Which loan pricing method is most suitable for this group of customers and why?