T for Credit analysis _ ans1 - TUTORIAL CREDIT RISK...

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TUTORIAL: CREDIT RISK ANALYSIS Q1/2. Differentiate between a secured and an unsecured loan. Who bears most of the risk in a fixed-rate loan? Why would bankers prefer to charge floating rates, especially for longer-maturity loans? A secured loan is backed by some of the collateral that is pledged to the lender in the event of default. A lender has rights to the collateral, which can be liquidated to pay all or part of the loan. In a fixed-rate loan, the lender of the loan bears the risk of interest rate changes; if interest rates rise, the opportunity cost of lending is higher. If interest rates fall, then the lender benefits. Since it is harder to predict longer-term rates, FIs prefer to charge floating rates for longer-term bonds and pass the risks on to the borrower. Q2/17. What are the purposes of credit scoring models? How could these models possibly assist an FI manager to better administer credit? Credit scoring models are used to calculate the probability of default or to sort borrowers into different default risk classes. The models use data on observed economic and financial borrower characteristics to
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This note was uploaded on 12/04/2011 for the course FIN 3230 taught by Professor Olgapak during the Fall '11 term at Kazakhstan Institute of Management, Economics and Strategic Research.

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T for Credit analysis _ ans1 - TUTORIAL CREDIT RISK...

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