FIN2024_FIN3054_Chapter 10_Credit Risk

What is base lending rate?

• An interest rate set by the banks after plus with credit risk

• An interest rate set by the central bank or federal reserve

• It's primary lending rate

• It's base rate plus credit risk

Interest rate charged by the bank is base lending rate (BR) + phi.

What does phi represent? Choose more than one answer.

• credit risk premium

• risk margin

• premium margin

• fee

Given base lending rate is 8% and phi is 2%. What is the interest rate charged by the bank?

• 9%

• 6%

• 10%

• 11%

Given base lending rate is 8% and phi is 2%. What is the simple promised interest return on the loan?

• 8%

• 10%

• 9%

• 11%

Suppose the interest rate charge is 10%. The loan origination fee is 0.125%. The compensating balance requirement is 8%. The reserve requirement is 10%. What is the k, return on the loan?

• 15%

• 12%

• 11%

• 9%

Suppose the interest rate charge is 10%. The loan origination fee is 0.125%. The compensating balance requirement is 8%. The reserve requirement is 10%. What is the contractually promised gross return on the loan?

• 15%

• 11%

• 9%

• 13%

What is the formula for k, the return on the loan or contractually promised gross return on the loan?

• [of+(BR+phi)]/(1-b)

• [of+(BR+phi)]/(1-b*RR)

• [of+(BR+phi)]/(1-b*(1-RR))

• [of+(BR+phi)]/(1-b/RR)

You are given the return on the loan k is 12.45%. What is the expected return on the loan if probability of default is 5%?

• 2.8%

• 9.8%

• 8.8%

• 6.8%

Suppose CIMB default model is: PDi=0.5*(D/E)-0.0525*(S/A). A customer walks in with D/E=0.3 and S/A=2. What is the probability of default for this customer?

• 4%

• 4.5%

• 5%

• 5.5%

Suppose RHB credit scoring model is: PDi=0.65*(D/E)-0.03*(PM). CIMB credit scoring model is: PDi=0.5*(D/E)-0.0525*(S/A). A customer walks in and tells you his D/E=0.3, PM=1.5; and S/A=0.2. Which bank will charge higher interest rate?

• Neither

• RHB

• CIMB

• BOTH