Scenario 2: Suppose a financial institution uses a loan base rate of 6.55% and sets the credit risk premium at 7.35%. The institution charges a 2.90% loan origination fee and imposes 2.65% compensating balances. The required reserves for this institution are 8%. Additionally suppose your institution specifies the following linear probability model to estimate the probability of default:

PD=0+1NumberofPriorDefaults2Income3CreditScore

0=1518

1=0.90

2=0.05

3=0.04

If a customer has a current income of $30,000, a credit score of 490, and 2 prior defaults, then what is their probability of default using the linear probability model?

Group of answer choices

A) 0.36

B) 0.20

C) -3.4

D) 0.80