Suppose there were two factors influencing the past default behavior of borrowers: the leverage or debtassets ratio (D/A) and the profit margin ratio (PM). Based on past default (repayment) experience, the linear probability model is estimated as:

PD_i = 0.105(D/A)_i - 0.35(PM)_i

Prospective borrower A has a D/A = 0.65 and a PM = 5%, and prospective borrower B has a D/A = 0.45 and PM = 1%.

Calculate the prospective borrowers expected probabilities of default (PD_i).

Group of answer choices

PD(A) = 4.375% ; PD(B) = 4.375%

PD(A) = 4.375% ; PD(B) = 5.075%

PD(A) = 5.075% ; PD(B) = 5.075%

PD(A) = 5.075% ; PD(B) = 4.375%

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