Bradley Thebeau – BJT6H5
08361178
FIN 4130: Management of Financial Institutions Fall 2009
Homework 5 Due: Tuesday, October 20, 2009
Pick 5 of the 9
problems to answer and turn in at the start of class.
Chapter 11:
18.
Suppose the estimated linear probability model is PD = 0.3X
1
+ 0.2X
2
 .05X
3
+
error, where X
1
= 0.75 is the borrower's debt/equity ratio; X
2
= 0.10 is the volatility of
borrower earnings; and X
3
= 0.10 is the borrower’s profit ratio.
a.
What is the projected probability of default for the borrower? b.What is the
projected probability of repayment if the debt/equity ratio is 2.5? c.
What is a major
weakness of the linear probability model?
29.
The following is a schedule of historical defaults (yearly and cumulative)
experienced by an FI manager on a portfolio of commercial and mortgage loans.
Loan Type Y ears Commercial:
Annual default Cumulative default Mortgage:
Annual default Cumulative default
1Year
0.00% ______
0.10% ______
2 Years
______ 0.10%
0.25% ______
3 Years
0.50% ______
0.60% ______
4 Years
______ 0.80%
______ 1.64%
5
0.30% ______
0.80% ______
Years after Issuance
a.
Complete the blank spaces in the table. b.
What are the probabilities that each
type of loan will not be in default after 5
years? c.
What is the measured difference between the cumulative default (mortality)
rates for commercial and mortgage loans after four years?32.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '09
 stansfield
 Standard Deviation, Debt, Interest, Mortgage loan, Bradley Thebeau

Click to edit the document details