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FIN 4130 HW5

# FIN 4130 HW5 - Bradley Thebeau BJT6H5 08361178 FIN 4130...

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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.

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FIN 4130 HW5 - Bradley Thebeau BJT6H5 08361178 FIN 4130...

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