FTX4087S_Workshop 2.pdf - Workshop Questions Question 1 Random Bank charges 1.2 loan origination fee and they must hold 2.5 reserve requirement at the

FTX4087S_Workshop 2.pdf - Workshop Questions Question 1...

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1 Workshop Questions Question 1 Random Bank charges 1.2% loan origination fee and they must hold 2.5% reserve requirement at the Reserve Bank of South Africa. You observe the following interest rates; the 3-month JIBAR is at 6.78%, the prime rate is 10% and the repo rate is 6.5%. Required 1. Determine the interest rate, for a 1-year to be charged by Random bank to a risky customer with a history of defaulting. 2. Determine the interest rate, for a 10-year to be charged by Random bank to a less risky customer with a good credit record. Question 2 1. Suppose there were two factors influencing the past default behavior of borrowers: the leverage or debt assets 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 ). Which borrower is the better loan candidate? Explain your answer
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