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Suppose a financial institution uses a loan base rate of 7.10% and sets the credit risk premium at 6.55%. The institution charges a 3.10%
Suppose a financial institution uses a loan base rate of 7.10% and sets the credit risk premium at 6.55%. The institution charges a 3.10% loan origination fee and imposes 3.85% compensating balances. The required reserves for this institution are 5%. Additionally suppose your institution specifies the following linear probability model to estimate the probability of default: PD Bo+BNumber of Outstanding Loans - B2Wealth -B3Credit Score Bo = 4,934.60 B = 20.00 B = 0.01 3 = 0.05 If the customer pledges 10% of the loan value as collateral, then what is the expected return on the loan? 35.90% 16.65% -79.26% 6.65%
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