quiz7.docx - Quiz 7 – Name Problem 1 A customer has...

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Quiz 7 – April 11, 2019 Name: Problem 1. A customer has approached a bank for a $100,000 1-year loan at a 12% interest rate. If the bank does not approve this loan application, the $100,000 will be invested in bonds that earn 6% annual return. Without additional information, the bank believes that there is a 4% chance that this customer will default on the loan, assuming that the loan is approved. If the customer defaults on the loan, the bank will lose $100,000. The bank can thoroughly investigate the customer’s credit record and supply a favorable or unfavorable recommendation. Past experience indicates that in cases where the customer did not default on the approved loan, the probability of receiving a favorable recommendation on the basis of the credit investigation was 80%. Furthermore, in cases where the customer defaulted on the approved loan, the probability of receiving a favorable recommendation on the basis of the credit investigation was 25%.
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