Tutorial Qs.doc

Decline unless he does not provide any cash

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DECLINE, unless he does not provide any cash collateral. 8. Ms. A has applied for a line of credit of $20,000 and the bank has approved such a facility, however she refuses to pay the 0.05% loan origination fee. She claims that other banks are prepared to give her the same loan without the fee. WAIVE THE FEE only if the customer has a long history banking with you and if other fees may be collected from other accounts or services provided to her like insurance, investment.
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9. Mr. B applied for a $20,000 line of credit to buy a car costing $25,000 and mentions that the other $5,000 would be withdrawn from his credit card. DECLINE, the $20,000 request and propose a $25,000 car loan to cover the full expenses. You need to ensure that he can pay the registration, insurance and other expenses. 10. Ms. B applies for a $350,000 home loan to buy an apartment in the city. No mention of legal fees or stamp duty fees are part of the loan request. DECLINE, the loan and any other personal contributions are required to cover all the expenses like conveyance costs, stamp duty and other costs related to the purchase of the house. 11. An unemployed 35 year old male is applying for a line of credit of $30,000 to finance his day-to-day expenses. He is offering a term deposit that he has as security. The loan application is 100% secured. DECLINE, as the primary source of repayment is his current earnings. Collateral/security is merely a secondary source of repayment. Banks lend because the customer has sufficient liquidity to pay off the loan. Collateral is a fallback position and should never be considered as the sole purpose of the loan. 12. An employed 35 year old male is applying for a line of credit of $30,000 to finance his day-to-day expenses. He has no collateral but his full-time employment yields him $80,000 a year. The bank’s decision would depend on HOW RISK AVERSE THEIR POLICIES ARE . A conservative bank would want both income generation and collateral. More risky bank would consider granting this credit unsecured.
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Topic 1 - Fundamentals of Credit Risk & Governance 1. What is the amount of Credit Risk? How much can be lost or what is the total cost if the obligor fails to repay or perform? Credit Risk is the total amount of principal and interest accrued to date with any attached fees and charges the bank deems appropriate. In Australia there is a full recourse system, i.e. the obligor is responsible for the full amount. The bank will not forfeit its claim on the individual’s assets until the full amount is completely recovered. In the US, where a non-recourse system exists the scenario is different where the homeowner would simply vacate the premises and the bank would sell the house, recover as much as they can and subsequently foreclose the loan. 2. What is the Default Probability (PD) of the counterparty? What is the likelihood that the obligor fails to pay or perform?
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  • Fall '19
  • Debt, Bill Ramsey

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